10-K 1 diga20131231_10k.htm FORM 10-K diga20131231_10k.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549 

 

FORM 10-K 

(Mark One) 

 

 

 

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2013

 

 

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

 

Commission file number: 000-26020

 

VERITEQ CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

 

Delaware 

 

43-1641533

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

220 Congress Park Drive, Suite 200,
Delray Beach, Florida 33445

(Address of principal executive offices, including zip code)

 

(561) 846-7000
Registrant’s telephone number, including area code

 

Securities registered pursuant to Section 12(b) of the Act:

 

(Title of each class)

 

(Name of each exchange on which registered)

Common Stock, $0.01 par value

 

OTC Markets

 

Securities registered pursuant to Section 12(g) of the Act: Not applicable

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☑

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes☑No ☐

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐ 

 

Accelerated filer ☐ 

 

Non-accelerated filer ☐ 

 

Smaller reporting company ☑

 

 

 

 

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

 

At June 30, 2013, the aggregate market value of the voting and non-voting common stock held by non-affiliates was approximately $1.5 million, computed by reference to the price at which the stock was last sold on that date of $1.50 per share as reported on the OTC Market.

 

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:

 

Class

 

Outstanding at April 10, 2014

Common Stock, $0.01 par value per share

 

9,936,464 shares

 

 
1

 

 

VERITEQ CORPORATION

TABLE OF CONTENTS

 

Item   Description   Page

 

 

 

 

 

 

 

PART I

 

 

 

 

 

 

 

1.

 

Business

 

3

1A.

 

Risk Factors

 

11

2.

 

Properties

 

16

3.

 

Legal Proceedings

 

16

4.

 

Mine Safety Disclosures

 

16

 

 

 

 

 

 

 

PART II

 

 

 

 

 

 

 

5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

17

6.   Selected Financial Data   18

7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

18

7A   Quantitative and Qualitative Disclosures about Market Risk   25

8.

 

Financial Statements

 

25

9.

 

Changes In and Disagreements with Accountants on Accounting and Financial Disclosure

 

25

9A

 

Controls and Procedures

 

25

9B

 

Other Information

 

26

 

 

 

 

 

 

 

PART III

 

 
         

10

 

Directors, Executive Officers and Corporate Governance

 

27

11

 

Executive Compensation

 

30

12

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

38

13

 

Certain Relationships and Related Transactions, and Director Independence

 

39

14

 

Principal Accountant Fees and Services

 

41

 

 

 

 

 

 

 

PART IV

 

 

 

 

 

 

 

15.

 

Exhibits and Financial Statements

 

42

 

 

Signatures

 

43

 

 
2

 

 

PART 1 

 

ITEM 1. BUSINESS 

 

Unless the context otherwise provides, when we refer to the “Company,” “we,” “VeriTeQ,” "vc," or “us,” we are referring to VeriTeQ Corporation and its wholly-owned subsidiaries.

 

Overview

 

VeriTeQ Corporation, or VC, formerly known as Digital Angel Corporation, acquired its wholly-owned subsidiary, VeriTeQ Acquisition Corporation, or VAC, a Florida corporation, pursuant to the terms of a share exchange agreement, as more fully discussed below. VC became the legal acquirer of VAC and VAC became the accounting acquirer of VC pursuant to the terms of the Exchange Agreement (defined below). In January 2012, VAC acquired all of the outstanding stock of PositiveID Animal Health Corporation, or PAH, a Florida corporation from PositiveID Corporation, a related party. In December 2012, VAC formed a subsidiary, VTQ IP Holding Corporation, a Delaware corporation. VAC was founded in December 2011 and is engaged in the business of radio frequency identification technologies, or RFID, for the Unique Device Identification, or UDI, of implantable medical devices, and radiation dose measurement technologies for use in radiation therapy treatment.

 

VeriTeQ is in the development stage as defined by Accounting Standards Codification subtopic 915-10 Development Stage Entities, or ASC 915-10, and its success depends on its ability to obtain financing and realize its marketing efforts. To date, VeriTeQ has generated minimal sales revenue, has incurred expenses and has sustained losses. Consequently, its operations are subject to all the risks inherent in the establishment of a new business enterprise. For the period from December 14, 2011 (Inception) through December 31, 2013, the Company has accumulated losses of approximately $16.7 million.

 

VeriTeQ has proprietary technology, including over 100 patents, patents pending, patent licenses, and U.S. Food and Drug Administration, or the FDA, cleared and CE marked products. VeriTeQ has two principal business lines: UDI for medical devices, and radiation dosimeters and other medical sensor applications.

 

On September 20, 2013, the FDA published in the Federal Register its Final Rule for UDI, or the FDA Rule, which requires all medical devices distributed in the U.S. that are intended to be used more than once and intended to undergo any form of reprocessing before each use, to carry a UDI directly on the device itself, called direct part marking. The FDA Rule was issued in response to the passage of the FDA Safety and Innovation Act, which directed the federal agency to develop regulations that would create a UDI system for medical devices. Medical devices that are reprocessed and reused will inevitably be separated from their original label and device package, and therefore the FDA states direct part marking is the only way to ensure the accurate identification of such devices.

 

In October 2004, VeriTeQ’s human-implantable RFID microtransponder, which is the basis for the VeriTeQ’s Q Inside Safety Technology, was cleared for use by the FDA. VeriTeQ believes that its Q Inside Safety Technology meets the automatic identification and data capture, or AIDC, technology requirement of the direct part marking mandate of the FDA Rule for reprocessed medical devices. The VeriTeQ UDI system consists of a passive implantable RFID microtransponder called “Q Inside Safety Technology,” a proprietary hand-held reader, and corresponding database.

 

Complementing its UDI technology, VeriTeQ has proprietary technologies and patents for implantable and wearable radiation dosimeters and bio-sensing technologies. Its radiation dosimeter portfolio includes previously commercialized, FDA cleared and CE marked radiation dosimeter technologies that were formerly used in numerous U.S. hospitals to measure radiation doses in vivo and on the skin surface. VeriTeQ’s OneDose® and DVS SmartMarker® technologies provide radiation oncologists, radiologists, therapists and physicists a tool to know the exact dosage of radiation delivered to a patient at the skin level and at the site of a tumor or tumor area.

  

Significant Developments

 

Share Exchange Agreement and Reverse Stock Split

 

On June 24, 2013, VAC and its stockholders entered into a share exchange agreement, or the Exchange Agreement, with VC and the closing of the transaction, or the VeriTeQ Transaction, took place on July 8, 2013. Pursuant to the terms of the Exchange Agreement, VAC exchanged all of its issued and outstanding shares of common stock for shares of VC’s preferred stock, which were converted into VC’s common stock automatically upon the effectiveness of the 1:30 reverse stock split, or the Reverse Stock Split, on October 18, 2013. In addition, all outstanding VAC stock options and warrants to purchase shares of VAC’s common stock, whether or not exercisable or vested, converted into options and warrants to acquire shares of VC’s common stock. As a result of the VeriTeQ Transaction, VAC became a wholly-owned subsidiary of VC.

  

 
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Based on the terms of the VeriTeQ Transaction, which are more fully described below under the heading, “The Company,” VAC was the accounting acquirer and as a result VAC’s operating results became the historical operating results of the Company. In addition, VAC’s common stock has been presented as if it was converted into shares of VC’s common stock at the beginning of the periods presented herein and based on an exchange ratio of 0.19083 under the terms of the Exchange Agreement. The exchange ratio took into consideration the Reverse Stock Split.

 

As a result of the Reverse Stock Split, all share information in this Annual Report has been restated to reflect the Reverse Stock Split as if it had occurred at the beginning of the periods presented, where appropriate.

 

Securities Purchase Agreement, Notes and Warrants

 

On November 13, 2013, we entered into a securities purchase agreement with a group of institutional and accredited investors. Pursuant to the terms of the agreement, we issued and sold to the investors the notes in the aggregate original principal amount of $1,816,667 and warrants to purchase up to 2,422,222 shares of our common stock. At closing, we received proceeds of $635,000 from the financing, which is net of $115,000 of the investors’ expenses paid for by the Company. The notes were issued with an original issue discount of $166,667 and $150,000 of the note balance represents an amount due to the placement agent for fees earned in connected with the securities purchase agreement. Under the terms of the financing, $750,000 of the proceeds were required to be placed in restricted bank accounts. In addition, $132,500 of proceeds from the sale of marketable securities that we sold under the terms of a securities purchase agreement with one of the investors dated November 21, 2013 was required to be placed in the restricted accounts on a pro rata basis. Thus, the restricted funds totalled $0.9 million at December 31, 2013. Per the terms of the financing, the restricted funds were to be applied to pay any redemption or other payments due under the applicable note to the applicable holder from time to time with a portion of the restricted funds to be released to us upon any conversion of the notes or at any time the balance of the funds placed in the restricted accounts by the note holders exceeds the principal of the applicable note then outstanding. However, to provide the Company with additional liquidity, on April 3, 2014, certain investors allowed the transfer of approximately $145,000 of the restricted funds to our operating account.


The terms of the financing are more fully set forth below in Note 5 to our accompanying consolidated financial statements.

  

Change in Management

 

Effective January 31, 2014, Michael E. Krawitz became our Chief Legal and Financial Officer replacing Lorraine M. Breece who resigned as our Chief Financial Officer on January 30, 2014. Ms. Breece is currently serving as our Director of Accounting.

 

Internet Website

 

Our internet website address is www.veriteqcorp.com. The information on this website is not incorporated by reference into this Annual Report on Form 10-K. We make available free of charge through our website annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, Forms 3, 4 and 5 filings, and all amendments to those reports and filings as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission, or SEC.

 

Effective April 20, 2007, we became a Delaware corporation. We initially incorporated in the state of Missouri on May 11, 1993. Our principal executive offices are located at 220 Congress Park Drive, Suite 200, Delray Beach, Florida (561-846-7000).

 

The Company

 

Share Exchange Agreement and Reverse Stock Split

 

On June 24, 2013, VAC and its stockholders entered in the Exchange Agreement with VC and the closing of the VeriTeQ Transaction took place on July 8, 2013, also referred to as the Closing Date. Pursuant to the terms of the Exchange Agreement, VAC exchanged all of its issued and outstanding shares of common stock for 4,107,592 shares of VC’s Series B Convertible Preferred Stock, or the Series B Preferred Stock. On July 10, 2013, VC realized that it incorrectly issued the Series B Preferred Stock and as result, on July 12, 2013, it exchanged the Series B Preferred Stock for 410,759 shares of its newly created Series C Convertible Preferred Stock, par value $10.00, or the Series C Preferred Stock. The terms of the Series C Preferred Stock are substantially similar to the Series B Preferred Stock, including the aggregate number of shares of common stock into which the Series C Preferred Stock was convertible. Each share of Series C Preferred Stock was convertible into twenty shares of VC’s common stock, par value $0.01 per share, or VC Conversion Shares, automatically upon the effectiveness of the Reverse Stock Split on October 18, 2013.

 

In addition, all outstanding stock options to purchase shares of VAC’s common stock, whether or not exercisable or vested, converted into options to acquire shares of VC’s common stock, or the Substitute Options, and all outstanding warrants to purchase shares of VAC’s common stock converted into warrants to purchase shares of VC’s common stock, or the Converted Warrants. As a result of the Exchange Agreement and the issuance of the Substitute Options and the Converted Warrants, VAC became a wholly-owned subsidiary of VC, and VAC’s shareholders owned on July 12, 2013 approximately 91% of VC’s common stock, on an as converted, fully diluted basis (including outstanding stock options and warrants).

  

 
4

 

 

Based on the terms of the transaction, VAC was the accounting acquirer and as a result VAC’s operating results became the historical operating results of the Company. In addition, VAC’s common stock has been presented herein as if it was converted into shares of VC’s common stock at the beginning of the periods presented herein based on an exchange ratio of 0.19083 under the terms of the Exchange Agreement. The exchange ratio took into consideration the Reverse Stock Split, which is more fully discussed below.

 

The Series C Preferred Stock consists of 500,000 authorized shares, 410,759 of which were issued and outstanding through October 18, 2013. The shares of Series C Preferred Stock issued to VAC’s shareholders in connection with the Share Exchange, by their principal terms:

 

(a)

converted into a total of 8,215,184 VC Conversion Shares, constituting approximately 88% of the issued and outstanding shares of common stock of VC, following the Reverse Stock Split on October 18, 2013 (as more fully discussed below);

(b)

have the same voting rights as holders of VC’s common stock on an as-converted basis for any matters that are subject to stockholder vote;

(c)

are not entitled to any dividends; and

(d)

are to be treated pari passu with the common stock on liquidation, dissolution or winding up of VC.

 

On July 12, 2013, VC obtained approval from a majority of its stockholders for and to effect a one for thirty (1:30) Reverse Stock Split. On October 18, 2013, VC filed a Certificate of Amendment to its Certificate of Incorporation with the Secretary of State of the State of Delaware to effect the Reverse Stock Split. The Reverse Stock Split became effective on October 18, 2013. The Reverse Stock Split caused the total number of shares of common stock outstanding, including the shares underlying the Series C Preferred Stock, to equal 9,302,674 shares of VC common stock based on the shares outstanding on October 18, 2013. The Reverse Stock Split did not affect the number of shares of VC’s authorized common stock, which remain at 50 million shares.

 

On July 12, 2013, pursuant to the Exchange Agreement, a majority of VC’s voting stockholders adopted resolutions by written consent approving the Digital Angel Corporation 2013 Stock Incentive Plan, or the DAC 2013 Stock Plan, under which employees, including officers and directors, and consultants may receive awards. The DAC 2013 Stock Plan  became effective on October 18, 2013.

 

Acquisition of VeriTeQ Corporation under Share Exchange Agreement

 

Given VAC’s former stockholders’ ownership in VC, as a result of the Exchange Agreement, VAC was considered to be the acquirer for accounting purposes and the transaction was accounted for as a reverse acquisition of VC by VAC under the accounting rules for business combinations. Accordingly, VC’s assets and liabilities were recorded at fair value to the extent they are deemed to have been acquired for accounting purposes and VC has established a new basis for its assets and liabilities based upon the fair values thereof and the value of VC’s shares outstanding on July 8, 2013, the closing date. The value of VC’s common stock was calculated based on the closing price of VC’s common stock on July 8, 2013, which was $0.90 per share on a post reverse stock split basis. The value of VC’s outstanding stock options was based on the closing price of VC’s common stock on July 8, 2013 and using the BSM valuation model using the following assumptions: expected term of 2.6 years, expected volatility of 106.6 %, risk-free interest rate of 0.62%, and expected dividend yield of 0%. Total purchase price was calculated to be approximately $0.9 million.

  

In addition, the Exchange Agreement created a new measurement date for the valuation of the options to acquire shares of VAC’s common stock, which were converted into options to acquire shares of VC’s common stock. The new measurement date was the closing date of the transaction which was July 8, 2013. This new measurement did not result in a non-cash compensation charge because the value of the modified options did not exceed the value of the options before the modification.

 

VC’s Business, Prior to the Transaction with VeriTeQ

 

Through May 3, 2013, VC’s business operations consisted primarily of its mobile game division, doing business as HammerCat Studio. On May 3, 2013, VC sold its mobile game division to MGT Capital Investments, Inc.

 

PositiveID Animal Health Corporation acquired by VeriTeQ Acquisition Corporation

 

On January 11, 2012, VAC entered into a stock purchase agreement with PositiveID Corporation, or PSID, to acquire the outstanding stock of PSID’s then wholly-owned subsidiary PAH. Our chairman and chief executive officer is the former chairman and chief executive officer of PSID. In addition, the current chairman and chief executive officer of PSID was a member of our board of directors until July 8, 2013.

 

Under the terms of the stock purchase agreement, VAC: (i) issued approximately 0.8 million shares of its common stock, valued at approximately $0.3 million for the 5.0 million shares of outstanding stock of PAH; (ii) assumed the obligations under outstanding common stock options to acquire 6.9 million shares of PAH, which it converted into stock options to acquire 6.9 million shares of VAC’s common stock and on October 18, 2013, converted into approximately 1.3 million shares of VC’s common stock; (iii) issued a promissory note payable to PSID in the principal amount of $0.2 million with a stated interest rate of 5% per annum, or the PSID Note; (iv) assumed obligations under an existing development and supply agreement; and (v) agreed to make royalty payments to PSID as more fully discussed below. VAC recorded a discount on the PSID Note of $60 thousand using a discount rate of approximately 11.9%. The stock options assumed, which have an exercise price of $0.05 per share, after conversion into VC stock, were valued at $0.5 million based on the BSM valuation model using the following assumptions: expected term of 8.2 years, expected volatility of 126%, risk-free interest rate of 1.50%, and expected dividend yield of 0%.

 

 
5

 

  

In connection with the acquisition, VAC entered into a license agreement with PSID, or the Original License Agreement, which granted it a non-exclusive, perpetual, non-transferable, license to utilize PSID’s bio sensor implantable RFID device that is protected under United States Patent No. 7,125,382, “Embedded Bio Sensor System,” or the Patent, for the purpose of designing and constructing, using, selling and offering to sell products or services related to its business, but excluding the GlucoChip or any product or application involving blood glucose detection or diabetes management. Pursuant to the Original License Agreement, PSID was to receive royalties in the amount of 10% on all gross revenues arising out of or relating to VAC’s sale of products, whether by license or otherwise, specifically relating to the Patent, and a royalty of 20% on gross revenues that are generated under a development and supply agreement between PSID and Medical Components, Inc., or Medcomp, dated April 2, 2009. The total cumulative royalty payments under the agreement with Medcomp will not exceed $0.6 million.

  

On June 26, 2012, the Original License Agreement was amended pursuant to which the license was converted from a non-exclusive license to an exclusive license, subject to VAC meeting certain minimum royalty requirements, which were amended during 2013. The total purchase price of the PAH assets acquired, net of a deferred tax liability of $0.8 million, was $1.2 million.

 

Bio Sensor Patents acquired by VeriTeQ Acquisition Corporation

 

On August 28, 2012, VAC entered into an Asset Purchase Agreement, or the APA, with PSID, whereby it purchased all of the intellectual property, including patents and patents pending, related to the PSID’s embedded bio sensor portfolio of intellectual property. Under the APA, PSID is to receive royalties in the amount of ten percent (10%) on all gross revenues arising out of or relating to VAC’s sale of products, whether by license or otherwise, specifically relating to the embedded bio sensor intellectual property, to be calculated quarterly with royalty payments due within 30 days of each quarter end. Minimum royalty requirements, which were to begin in 2013 and thereafter through the remaining life of any of the patents and patents pending, were identical to the minimum royalties due under the Original License Agreement, as amended.

 

Simultaneously with the APA, VAC entered into a license agreement with PSID granting PSID an exclusive, perpetual, transferable, worldwide and royalty-free license to the patent and patents pending that are a component of the GlucoChip in the fields of blood glucose monitoring and diabetes management. In connection with the APA, the Original License Agreement, as amended June 26, 2012, was terminated. Also on August 28, 2012, the PSID Security Agreement was amended, pursuant to which the assets sold by PSID to VAC under the APA and the related royalty payments were added as collateral under the PSID Security Agreement. 

We had no plans to develop or commercialize the Bio Sensor patents, and therefore, no value was ascribed to these patents. Further, we are not aware of a buyer or licensor for these patents.

 

On July 8, 2013, we entered into a letter agreement with PSID, which modified the terms of the royalty payments due to PSID under the APA, and on November 8, 2013, we amended the July 8, 2013 letter agreement, as more fully discussed in Note 10 to the accompanying consolidated financial statements.

 

VeriTeQ Acquisition Corporation Asset Purchase Agreement with SNC Holding Corp.

 

In December 2012, VAC entered into an asset purchase agreement and a royalty agreement with SNC Holding Corp. wherein VAC acquired various technology and trademarks related to its radiation dose measurement technology. Under the terms of the agreements, VAC issued a non-interest bearing secured subordinated convertible promissory note, in the principal amount of $3.3 million and agreed to make royalty payments based on a percentage of revenue earned from the technology acquired. In addition, under the terms of sublicense agreement related to the technology, VAC made a $20 thousand sublicense payment in February 2013 and agreed to make minimum sublicense payments aggregating $0.2 million over the period from June 2014 to March 2017. The promissory note is convertible into one-third of the beneficial stock ownership of VC held by our CEO, or approximately 2.2 million shares at January 30, 2014. The promissory note was recorded at its initial estimated fair value of approximately $2.1 million and is being re-valued at each reporting period with changes in the fair value recorded as other expense/income. The fair value of the promissory note on December 31, 2013 is approximately $4.9 million. The total purchase price, including estimated royalty obligations of $3.7 million, was approximately $5.8 million. In connection with the asset purchase agreement with SNC Holding Corp., VAC entered into a security agreement whereby certain intellectual property purchased thereunder, including intellectual property related to its dosimeter products, would revert to SNC Holding Corp. in the event of: (i) a default under the promissory note; (ii) failure to pay the minimum royalty obligations; (iii) failure to perform its obligations with respect to commercializing the intellectual property acquired; or (iv) the occurrence of an unauthorized issuance as defined in the agreement. The unamortized balance of the intellectual property related to our dosimeter products that would revert to SNC Holdings Corporation was $5.4 million as of December 31, 2013.         

 

 
6

 

 

Industry Overview and Principal Products and Services

 

Industry data indicates that there were 1.2 million breast augmentations performed worldwide in 2011 and 33,000 plastic surgeons worldwide according to the International Society of Aesthetic Plastic Surgeons. According to an iData Research published in May of 2011, “U.S. Market, Vascular Access Devices and Accessories,” data showed that there were 422,000 vascular port procedures performed that year in the US. It also stated that there are 8,000 surgery centers and six major manufacturers in the U.S. Additionally, there were 230,000 artificial hip procedures and 543,000 artificial knee procedures in the U.S. in 2011 according to 24/7 Wall St. research.

 

VAC’s business

 

VAC was founded in December 2011 and is engaged in the business of using RFID for the UDI of implantable medical devices, and radiation dose measurement technologies for use in radiation therapy treatment. VeriTeQ has proprietary technology, including over 100 patents, patents pending, patent licenses, FDA cleared and CE marked products. VeriTeQ has two principal business lines: unique identification technologies for medical devices, and radiation dosimeters and other medical sensor applications.

 

         

    

Q-Inside Safety Technology

 

On September 20, 2013, the FDA published the FDA Rule, which requires all medical devices distributed in the U.S. that are intended to be used more than once and intended to undergo any form of reprocessing before each use to carry a UDI directly on the device itself, called direct part marking. The FDA Rule was issued in response to the passage of the FDA Safety and Innovation Act, which directed the federal agency to develop regulations that would create a UDI system for medical devices. Medical devices that are reprocessed and reused will inevitably be separated from their original label and device package, and therefore the FDA states direct part marking is the only way to ensure the accurate identification of such devices.

 

In October 2004, VeriTeQ’s human-implantable RFID microtransponder, which is the basis for the VeriTeQ’s Q Inside Safety Technology, was cleared for use by the FDA. VeriTeQ believes that its UDI technology meets the automatic identification and data capture, or AIDC, technology recommendation of the direct part marking mandate of the FDA Rule for reprocessed medical devices. The VeriTeQ UDI system consists of a passive implantable RFID microtransponder called “Q Inside Safety Technology,” a proprietary hand-held reader/scanner, and corresponding database.

 

We believe the benefits of our UDI Q Inside Safety Technology to be:

 

 

Allows more accurate reporting and analysis of adverse events to quickly identify problem devices;

 

Reduces medical errors by quickly and accurately identifying a device and its characteristics;

 

 
7

 

 
 

Provides a standardized identifier that allows manufacturers, distributors and healthcare facilities to more effectively manage medical device recalls;

 

Provides a consistent way to enter information about devices in electronic health records and clinical information systems; and

 

Provides a foundation for a global, secure distribution chain, helping to address counterfeiting and diversion and prepare for medical emergencies. 

 

The challenges we faced in incorporating the UDI chip into the silicone breast implants are the extreme high-heat temperatures that the breast implant goes through during the manufacturing process as well as the additional high-heat levels required for sterilization or “autoclave” process for the breast implant sizers, which must be sterilized after each use. It is imperative that the inter-core of the transponder work past certain heat levels. We have worked with our development partner, Establishment Labs, S.A., to ensure that the chip maintains its integrity and effectiveness at temperatures of 400 degrees Fahrenheit.

 

Other challenges we face as they relate to our UDI products include customer specific performance and testing requirements, ISO compliance issues and the length of time for a customer to file with and have our device cleared by the FDA for use in their products. We are also working through issues surrounding the use of our Q Inside Safety Technology products on implantable devices that are made of metal. RFID devices will not “read” when place directly on metal so our UDI products for these types of devices will need to be incased in plastic or other material to function properly.

 

Dosimeter Technology

 

Complementing its UDI technology, VeriTeQ has proprietary technologies and patents for implantable and wearable radiation dosimeters and bio-sensing technologies. Its radiation dosimeter portfolio includes previously commercialized, FDA cleared and CE marked radiation dosimeter technologies that were formerly used in numerous U.S. hospitals to measure radiation doses in vivo and on the skin surface. VeriTeQ’s OneDose® and DVS SmartMarker® technologies provide radiation oncologists, radiologists, therapists and physicists a tool to know the exact dosage of radiation delivered to a patient at the skin level and at the site of a tumor or tumor area.

 

VeriTeQ’s external (wearable) radiation dosimeter technology, OneDose, has FDA clearance and CE marks for use in patients being treated with external beam radiation therapy, while its implantable radiation dosimeter technology, DVS SmartMarker, has FDA clearance and CE marks for use in breast and prostate cancer patients undergoing radiation therapy.

 

OneDose is a proprietary, wearable radiation dosimetry technology, single-use system that is used to verify the radiation dose delivered to a patient. The OneDose system is comprised of disposable sensors that attach to the patient’s skin using a basic adhesive and hand-held scanner that reads the sensor. OneDose is the only wireless, pre-calibrated, disposable, skin surface sensor that provides instant dose delivery data, which could be fed into patient radiology reports and electronic health records.

 

DVS (dose verification system) SmartMarker is a proprietary, wireless, implantable radiation dosimetry technology that enables radiation oncologists to both locate tumors and verify that the accurate radiation doses have been delivered to a tumor or tumor site. The VeriTeQ DVS SmartMarker technology is comprised of an implantable dosimeter and a hand-held scanner that reads the data gathered by the implanted microtransponders. Like OneDose, the DVS SmartMarker could be used to populate patient radiology reports and electronic health records.

 

VeriTeQ has over 100 patents, patent applications and patent licenses that protect its intellectual property in the United States and internationally. In addition to the UDI and dosimeter related patents, VeriTeQ also has patents which protect its RFID reader/scanner and microtransponder technologies. VeriTeQ’s RFID reader/scanner and microtransponder technologies could protect differentiated technical characteristics in UDI, radiation dosimetry and biosensor enabled products.

 

VeriTeQ’s OneDose and DVS SmartMarker systems are protected by a portfolio of patents including broad foundational patents. In addition to its foundational patents, VeriTeQ has a number of patents that protect more specific applications of its technology such as those that cover VeriTeQ’s OneDose and DVS SmartMarker products. As additional applications for VeriTeQ’s technologies are developed, VeriTeQ will pursue further patent protection.

 

Though FDA cleared and CE marked, VeriTeQ’s dosimetry technologies are not currently on the commercial market.

 

Data Services

 

In addition to our UDI and radiation dosimetry businesses, we intend to offer data services including database connectivity to our microtransponders and application software through our Office of Medicine and Data Science. Data extracted from VeriTeQ's UDI and dosimeter technologies could wirelessly populate third-party databases maintained by VeriTeQ, hospitals, health insurers, or regulators, and support electronic health record and evidence-based healthcare initiatives. We currently have one customer that has just begun to use our data services.

  

 
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Growth Strategy 

 

We intend to grow our business and product lines internally and through strategic acquisitions.

 

Sales, Marketing and Distribution

 

Our sales, marketing and distribution plan for our products is to align with medical device manufacturers and their distributors, and manufacture the products to their specifications.

 

Our current customer for our UDI breast implant chips and readers is Establishment Labs S.A., which sells its breast implants under the name Motiva Implant Matrix®. The general terms under our development and supply agreement with Establishment Labs are:

 

 

5 year term, with extension as agreed to by the parties;

 

Purchase price - for microtransponders -$9.00 each;

 

Purchase price - for RFID readers/scanners - $600.00 each, subject to volume discounts; and

 

Revenue share – Establishment Labs will receive a 10% revenue share payment in any year where the sale of microtransponders to third parties exceeds 100,000 microtransponders.

 

The RFID readers/scanners we sell are used to identify the direct mark contained on the microtransponders, which is unique identification number. We buy our readers from a manufacturer and resell them at a mark-up. We do not yet have an agreement in place with the manufacture of the RFID readers/scanners.

 

We also are party to a development and supply agreement with Medcomp, dated April 2, 2009, which we acquired under the terms of the stock purchase agreement for PAH in January 2012. We have not yet generated any revenue under this agreement, which relates to the development and sale of our vascular port products. The general terms of the agreement are

 

5 year term, with extension as agreed to by the parties beginning upon the last to occur of either 510K approval or production of the product; and

 

Purchase price for units -$10.00, $9.00 and $8.50 each depending on the volume of product purchased.

 

Other targeted customers are:

 

UDI Products

 

Breast Implant Manufacturers-Allergan, Mentor, Sientra, among others;

Vascular Port Manufactures – CR Bard, Smiths;

Artificial Joint Manufactures- Stryker, Zimmer, Synthes, Wright, Boston Scientific, among others;

Heart Valve Sizers, Endo/ Surgical Equipment – Medtronic, St. Jude Medical, Welch Allyn and Cook Medical; and

Scope Manufacturers – Pentax, Olympus and Fujinon.

 

Dosimeter Products

 

Our potential customers are radiation oncologists. Potential distribution partners are: Varian Medical Systems, BSD Medical, Calypso, Siemens, Henry Schein, MedComp, Elekta, McKesson, Standard Imaging, among others.

 

Competitive Conditions

 

As it relates to UDI applications for reprocessed medical devices that adhere to the FDA Rule for a UDI System, VeriTeQ believes that the Q Inside Safety Technology is the only FDA cleared technology that serves as a direct part marking with AIDC features and, therefore, meets the AIDC recommendation for reprocessed medical devices under the FDA Rule. There are 2D and 3D barcodes and etching that could technically be AIDC for the direct part marking recommendation on a reprocessed device. The direct part marking can be in the form of plain text and/or AIDC.

 

Several competing technologies to VeriTeQ’s OneDose exist that support radiation dose monitoring via the surface of a patient’s skin. However, OneDose is unique in terms of the combination of its ease-of-use and ability to automatically archive patient dosage data. OneDose is a disposable, pre-calibrated technology that can wirelessly report radiation dose delivery on demand in real time.

 

VeriTeQ’s DVS SmartMarker is the only FDA cleared and CE marked implantable radiation dosimeter technology able to measure radiation dose at the tumor site. We recently announced that we would rebrand our DVS Smart Market as Q Inside SmartMarker. VeriTeQ is unaware of any alternate technology that can be used to both locate the patient’s tumor and confirm delivery of the prescribed radiation dosage at the site of the tumor.

  

 
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Intellectual Property

 

VeriTeQ has proprietary technology, including over 100 patents, patents pending, patent licenses, and FDA cleared and CE marked products. Certain of our patents are subject to security and or license agreements that require us to make certain payments, including the payment due under a promissory note, in order for us to retain exclusivity and/or usage.Our patent that relates to the use of our Q Inside Safety Technology in a breast implant is jointly owned with Establishment Labs. Pursuant to our agreement with Establishment Labs, which is more fully discussed above on page 9, we have agreed to pay them a 10% royalty in any year in which sales of the Q Inside Safety Technology for breast implants to third parties exceeds 100,000 microtransponders. Q Inside Safety Technology is a trade name being used in connection with the Company’s UDI products and, as discussed above, we are branding our dosimeter products as Q Inside SmartMarker. Other registered trade names are VeriTeQ’s OneDose® and DVS SmartMarker®. We have a covenant not to sue/license agreement from Destron Fearing Corporation and its parent, Allflex U.S.A. Inc., authorizing us to deploy any of their technology and/or patents created before November 2008 free of charge for use in the medical field. 

 

Manufacturing; Supply Arrangements

 

VeriTeQ’s products are manufactured by third parties. Its Q Inside product is manufactured by RFID Solutions in Malaga, Spain under a verbal agreement. We source our readers/scanners from a third party manufacturer. Currently, we purchase readers from Destron Fearing Corporation, the manufacturer, under a simple purchase order process rather than under a written agreement. VeriTeQ’s radiation dosimeter products were previously manufactured by Bourns, Inc., a Riverside, California-based company. As of the date of this prospectus, we have not had material difficulties obtaining any of the materials for our products; however, we have not purchased significant qualities to date. We believe that if any of our manufacturers or suppliers were to cease supplying us with products, we would be able to procure alternative sources without material disruption to our business. We plan to continue to outsource any manufacturing requirements of our current and under development products.

 

Environmental Regulation

 

We must comply with local, state, federal, and international environmental laws and regulations in the countries in which we do business, including laws and regulations governing the management and disposal of hazardous substances and wastes. We expect our operations and products will be affected by future environmental laws and regulations, but we cannot predict the effects of any such future laws and regulations at this time. Customers who place our products on the market in the European Union are required to comply with EU Directive 2002/96/EC on waste electrical and electronic equipment, known as the WEEE Directive. Noncompliance by our distributors with EU Directive 2002/96/EC would adversely affect the success of our business in that market. Additionally, we are investigating the applicability of EU Directive 2002/95/EC on the restriction of the use of certain hazardous substances in electrical and electronic equipment, known as the RoHS Directive which took effect on July 1, 2006. We do not expect the RoHS Directive will have a significant impact on our business.

  

Government Regulation

 

VeriTeQ’s business is subject to regulation by governmental agencies in the U.S., including the FDA, and in the European Union, including the European Commission.

 

U.S. Federal Communications Commission Regulations 

 

Under FCC regulations and Section 302 of the Communications Act, RFID devices must be authorized and comply with all applicable technical standards and labeling requirements prior to being marketed in the United States. The FCC’s rules prescribe technical, operational and design requirements for devices that operate on the electromagnetic spectrum at very low powers. The rules ensure that such devices do not cause interference to licensed spectrum services, mislead consumers regarding their operational capabilities or produce emissions that are harmful to human health. Our RFID devices are intentional radiators, as defined in the FCC’s rules. As such, our devices may not cause harmful interference to licensed services and must accept any interference received. We must construct all equipment in accordance with good engineering design as well as manufacturers’ practices.

 

Manufacturers of RFID devices must submit testing results and/or other technical information demonstrating compliance with the FCC’s rules in the form of an application for equipment authorization. The FCC processes each application when it is in a form acceptable for filing and, upon grant, issues an equipment identification number. Each of our RFID devices must bear a label which displays the equipment authorization number, as well as specific language set forth in the FCC’s rules. In addition, each device must include a user manual cautioning users that changes or modifications not expressly approved by the manufacturer could void the equipment authorization. As a condition of each FCC equipment authorization, we warrant that each of our devices marked under the grant and bearing the grant identifier will conform to all the technical and operational measurements submitted with the application. RFID devices used and/or sold in interstate commerce must meet these requirements or the equipment authorization may be revoked, the devices may be seized and a forfeiture may be assessed against the equipment authorization grantee. The FCC requires all holders of equipment authorizations to maintain a copy of each authorization together with all supporting documentation and make these records available for FCC inspection upon request. The FCC may also conduct periodic sampling tests of equipment to ensure compliance. We believe we are in substantial compliance with all FCC requirements applicable to our products and systems which are offered for sale or lease in the United States. 

  

 
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Seasonality

 

We do not believe that our business in significantly impacted by seasonality.

 

Employees 

 

At March 31, 2014, we employed 11 full-time employees and two part-time employee. We believe we have a positive relationship with our employees.

 

Geographic Areas 

 

Our operations are located in the U.S. However, our one customer during 2013, Establishment Labs, is based in Costa Rica, S.A.

 

Dependence on One or a Few Major Customers

 

Our medical device applications were under development during most of 2013 and, therefore, we only generated $18,000 in revenue during 2013, which was from one customer, Establishment Labs.

 

ITEM 1A. RISK FACTORS 

 

Risks Related to Our Operations and Business

 

We have a history of losses and expect to incur additional losses in the future. We are unable to predict the extent of future losses or when we will become profitable.

 

For the years ended December 31, 2013 and 2012, we experienced net losses of $15.1 million and $1.6 million, respectively, and our accumulated deficit at December 31, 2013 was $16.7 million. We reported only $18,000 of revenue for the year ended December 31, 2013 and no revenue for the year ended December 31, 2012. Until one or more of the products under development is successfully brought to market, we do not anticipate generating significant revenue or gross profit. We expect to continue to incur operating losses for the near future. Our ability in the future to achieve or sustain profitability is based on a number of factors, many of which are beyond our control. Even if we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods.

 

Our financial statements indicate conditions exist that raise substantial doubt as to whether we will continue as a going concern.

 

Our annual audited financial statements for the years ended December 31, 2013 and 2012 indicate conditions exist that raise substantial doubt as to whether we will continue as a going concern. Our continuation as a going concern is dependent upon our ability to obtain financing to fund the continued development of products and our working capital requirements. Our consolidated financial statements do not include any adjustments to reflect the possible future effects on the recovery and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

 

We are a development stage company and we are introducing new products without a record of sales in the marketplace, and if we are not successful in launching some of our products, we may need to cease ongoing business operations.

 

We are a development stage company as defined by ASC 915-10, and our success depends on our ability to obtain financing and realize sales from our marketing efforts. To date, we have only generated a minimum amount of sales revenue beginning in October 2013, we have incurred expenses and we have sustained significant losses. Consequently, our operations are subject to all the risks inherent in the establishment of a new business enterprise. If our products fail to gain market acceptance, we will be unable to achieve the necessary revenues, which will allow us to remain in business. Notwithstanding the need for our products in the marketplace, products like ours do not yet exist, and may not be accepted.

 

There can be no assurance that the products we intend to offer will be accepted by the marketplace and we may never operate profitably, even in the long term. Operations will be subject to all the risks inherent in the establishment of a developing enterprise and the uncertainties arising from the absence of a significant operating history. Potential investors should be aware of the difficulties normally encountered in commercializing new products and services. If the business plan is not successful, and we are not able to operate profitably, investors may lose some or all of their investment in us.

  

Our failure to raise additional capital to fund our operations and complete our work in introducing our products and launch an effective marketing campaign could reduce our ability to compete successfully and adversely affect our results of operations.

 

We need to raise additional funds to fund our operations and to achieve our future strategic objectives, and we may not be able to obtain additional debt or equity financing on favorable terms, if at all. If we raise additional equity financing, our security holders may experience significant dilution of their ownership interests and the value of shares of our common stock could decline. If we engage in debt financing, we may be required to accept terms that restrict our ability to incur additional indebtedness, force us to maintain specified liquidity or other ratios or restrict our ability to pay dividends or make acquisitions.

  

 
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If we cannot raise the additional capital we need on acceptable terms, we may not be able to, among other things:

 

 

fund our operations and pay our existing accounts payable and accrued expenses;

 

 

continue to expand our technology development, sales and/or marketing efforts;

  

  

  

 

hire, train and retain employees; or

 

 

develop and enhance our existing products and services.

 

Our inability to do any of the foregoing could reduce our ability to compete successfully and adversely affect our results of operations and our ability to continue as a going concern.

 

Our stock price has reflected a great deal of volatility, including a significant decrease over the past few years. The volatility may mean that, at times, our stockholders may be unable to resell their shares at or above the price at which they acquired them. 

 

From January 1, 2012 to March 31, 2014, the price per share of our common stock has ranged from a high of $4.80 to a low of $0.60. The price of our common stock has been, and may continue to be, highly volatile and subject to wide fluctuations. The market value of our common stock has declined in the past, in part, due to our operating performance. In the future, broad market and industry factors may decrease the market price of our common stock, regardless of our actual operating performance. Recent declines in the market price of our common stock have and could continue to affect our access to capital, and may, if they continue, impact our ability to continue operations at the current level. In addition, any continuation of the recent declines in the price of our common stock may curtail investment opportunities presented to us, and negatively impact other aspects of our business, including our ability to raise the funds necessary to fund our operations. As a result of any such declines, many stockholders have been or may become unable to resell their shares at or above the price at which they acquired them.

 

We are a very small company with limited resources compared to some of our potential competitors and we may not be able to compete effectively and increase market share.

 

The success of a technology/medical device business, like ours, is dependent not only upon its patents, but also on reaching the market quickly, safely and effectively. Notwithstanding patent protections, it is possible that another technology/medical device company could develop a non-infringing product that meets the same needs that are addressed by our products. A larger, better capitalized or better connected technology/medical device company could be able to innovate more quickly and reach the market using far more resources. As a result, a competitor could reach the market first, blocking us from some or all of the market for our products.

 

Because we are small, we may have challenges in selling our products that a well-known brand would not have and our ability to negotiate financing sources and customers may be more difficult than if we were a larger entity.

 

As a new company, we do not have a reputation that bigger, well established companies have. Particularly in the technology/medical device market, in which trust in product quality is important, the absence of a proven reputation could make selling our products more difficult. On the other hand, if our products are well received in the market, we may have challenges associated with rapid growth, such as needing capital for inventory, IT infrastructure and personnel, and needing time to adequately retain and train personnel.

 

We will need to conduct additional debt or equity financings, and we may have difficulty negotiating favorable or market-rate terms because we are small and the risk of engaging in a financing transaction with us is higher than it would be with a well-established entity. Similarly, we will need to sell our products, almost exclusively to organizations that are much larger than we are. They often will have enhanced strength in any negotiations because they are not as dependent on our products as much as we would be dependent on them.

 

Our commercial success depends significantly on our ability to develop and commercialize our products without infringing the intellectual property rights of third parties.

 

Our commercial success will depend, in part, on operating our business without infringing on the proprietary rights of third parties. Third parties that believe we are infringing on their rights could bring actions against us claiming damages and seeking to enjoin the development, marketing and use of our website and services. If we become involved in any litigation, it could consume a substantial portion of our resources, regardless of the outcome of the litigation. If any of these actions are successful, we could be required to pay damages and/or to obtain a license to continue to develop or market our services, in which case we may be required to pay substantial royalties. However, any such license may not be available on terms acceptable to us or at all. Ultimately, we could be prevented from commercializing our products or be forced to cease some aspect of our business operations as a result of patent infringement claims, which would harm our business.

 

Our results of operations may be adversely affected if we write-off our intangible assets.

 

As of December 31, 2013, our intangible assets, net of accumulated amortization, totaled $7.0 million. We assess the fair value of our intangible assets annually or earlier if events occur or circumstances change that would more likely than not reduce the fair value of these assets below their carrying value. If we determine that an impairment has occurred, we will be required to write off the impaired portion of the intangible assets. If an impairment charge was to occur it could have a material adverse effect on our operating results and financial condition.

 

 
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Our industry changes rapidly as a result of technological and product developments, which may quickly render our product candidates less desirable or even obsolete. If we are unable or unsuccessful in supplementing our product offerings, our revenue and operating results may be materially adversely affected.

 

The industry in which we operate is subject to rapid technological change. The introduction of new technologies in the market, including the delay in the adoption of these technologies, as well as new alternatives for the delivery of products and services will continue to have a profound effect on competitive conditions in this market. We may not be able to develop and introduce new products, services and enhancements that respond to technological changes on a timely basis. If our product candidates are not accepted by the market as anticipated, if at all, our business, operating results, and financial condition may be materially and adversely affected.

 

We have pledged our intellectual property, and may pledge more in the future, in connection with financing transactions. If we default on our obligations under the terms of those agreements the secured parties can take our intellectual property, which would hurt our ability to sell our products and maintain a competitive advantage and could have a material adverse effect on our business.

 

Under the terms of a financing we entered into in November 2013 and an asset purchase agreement with SNC Holdings Corp. that we entered into in December 2012, certain intellectual property, including intellectual property related to our UDI and dosimeter products is pledged as security If we default on our obligations under the terms of those agreements, the secured parties can take our intellectual property. In addition, if we do not pay certain royalty payments based on our attainment of certain sales levels for the calendar year 2014 to a related party, we are required to grant the related party a non-exclusive, perpetual, non-transferrable, world-wide, fully paid license to said patents. The loss of our intellectual property or the rights to the exclusive use of certain intellectual property will hurt our ability to sell our products and/or maintain a competitive advantage.

 

Our success depends on continuing to hire and retain qualified personnel, including our directors and officers and our technical personnel. If we are not successful in attracting and retaining these personnel, our business will suffer.

 

Our success depends substantially on the performance of our management team and key personnel. We believe our Chairman and Chief Executive Officer, or CEO, is extremely important in connection with our ability to communicate with bankers, development partners and potential investors. Our President is extremely important in connection with the further development of our products and will be extremely important in generating revenue from those products. Our future success will depend on our ability to attract, integrate, motivate and retain qualified technical, sales, operations, and managerial personnel, as well as our ability to successfully implement a plan for management succession. We believe that retaining qualified personnel is particularly difficult for companies that do not yet have revenue, and we may not be able to continue to attract and retain key personnel. In addition, if we lose the services of any of our management team or key personnel and are not able to find suitable replacements in a timely manner, our business could be disrupted and we may incur increased operating expenses.

 

If we are unable to manage our growth effectively, our business, financial condition and results of operations may be adversely affected.

 

We intend to develop a customer base, expand our product offerings and pursue market opportunities. The expansion of our operations and employee base is expected to place a significant strain on our management, operational and financial resources. There can be no assurance that our current management or sales, marketing and support or technical personnel will be able to support our future operations or to identify, manage and exploit potential market and technological opportunities. If we are unable to manage growth effectively, such inability could have a material adverse effect on our business, financial condition and results of operations.

 

Our products are subject to regulatory approval, and failure to obtain such approval may adversely affect us.

 

Our products are regulated by the FDA in the United States, or U.S., and analogous agencies in other countries. Failure to obtain, or timely obtain, approvals from the regulating agencies would delay or prevent our entry into the market with our products. Application to, and compliance with, these agencies can be costly, and may require resources that would detract from our other efforts, such as sales or marketing.

 

Liquidation of Signature Industries Limited may result in additional cash obligations.

 

In March 2013, VC appointed a liquidator and initiated the formal liquidation of its U.K. subsidiary, Signature Industries Limited, or Signature, primarily related to its outstanding liabilities. VC used £40,000 ($61,000) of the purchase price from the sale of Signature’s former division, Digital Angel Radio Communications, Inc., or DARC, to satisfy its estimated portion of Signature’s outstanding liabilities. However, one party has submitted a claim to the liquidator for approximately £244,000 (U.S. $0.4 million). This claim is associated with an outsourced manufacturing agreement related to a terminated manufacturing contract. As a result of the termination of the contract, Signature did not purchase any products under the manufacturing agreement and, accordingly, VC, in consultation with outside legal counsel, does not believe that any amount is owed per the terms of the agreement. However, this claim could result in VC having to pay an additional estimated portion of Signature’s outstanding liabilities, which if significant, could have a materially adverse effect on our financial position and cash flow. We expect the liquidation to be completed by the middle of 2014, although it could extend beyond the expected timeframe.

  

 
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We may be involved in legal claims which could materially adversely affect us.

 

Claims or disputes against the Company may arise in the future. Results of legal proceedings are subject to significant uncertainty and, regardless of the merit of the claims, litigation may be expensive, time-consuming, disruptive to our operations and distracting to management.

 

Medical devices are subject to products liability claims, and such claims, regardless of merit, could be disruptive and costly, and may exceed any insurance we have in connection with products liability. Although our management considers the likelihood of such an outcome to be remote, if one or more of these legal matters were resolved against us for amounts in excess of management’s expectations, our results of operations could be materially adversely affected. Further, such outcome could result in significant compensatory, punitive or trebled monetary damages, disgorgement of revenue or profits, remedial corporate measures or injunctive relief against us, all of which could have a material impact on our business, intellectual property, results of operations or cause us financial harm.

 

Because our Chairman and CEO owns a substantial percentage of our common stock, he may be able to exercise greater control over the decisions of the stockholders.

 

Mr. Scott Silverman, our Chairman and CEO, holds 5,462,770 shares of our outstanding common stock, representing approximately 55% of the voting rights of the Company. As such, Mr. Silverman will have greater influence in determining the outcome of all corporate transactions or other matters, including mergers, consolidations and the sale of substantially all of our assets, and also the power to prevent or cause change of control. Until Mr. Silverman’s voting rights are below 50% of the voting rights outstanding, your ownership in our common stock will not affect the outcome on any corporate transactions or other matters.

 

Because we will be subject to the “Penny Stock” rules, the level of trading activity in our stock may be reduced.

 

The SEC has adopted regulations which generally define "penny stock" to be any listed, trading equity security that has a market price less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exemptions. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market. The broker-dealer must also provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer’s account. In addition, the penny stock rules generally require that prior to a transaction in a penny stock, the broker-dealer make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for a stock that becomes subject to the penny stock rules which may increase the difficulty Investors may experience in attempting to liquidate such securities. 

 

Current stockholders may experience dilution of their ownership interests because of the future issuance of additional shares of our common stock issued pursuant to our debt instruments. 

 

In the future, we may issue our authorized but previously unissued equity securities, resulting in the dilution of the ownership interests of our present stockholders. We are currently authorized to issue an aggregate of 55,000,000 shares of capital stock consisting of 50,000,000 shares of common stock and 5,000,000 shares of preferred stock with preferences and rights to be determined by our Board of Directors. As of April 10, 2014, there are 9,936,464 shares of our common stock outstanding. There are 2,238,405 stock options outstanding and we have 2,510,795 shares of our common stock reserved for issuance under our stock option plans. We also have 3,284,763 shares of our common stock outstanding for issuance upon the exercise of outstanding warrants. In addition, we have convertible notes outstanding that are presently convertible into an aggregate of 4,660,672 shares of our common stock. Any future issuance of our equity or equity-backed securities may dilute then-current stockholders’ ownership percentages and could also result in a decrease in the fair market value of our equity securities, because our assets would be owned by a larger pool of outstanding equity.      

   

 
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To fund our business, we will need to raise additional capital through public or private offerings of our common or preferred stock or other securities that are convertible into or exercisable for our common or preferred stock. We may also issue such securities in connection with hiring or retaining employees and consultants (including stock options issued under our equity incentive plans), as payment to providers of goods and services, in connection with acquisitions or for other business purposes. Our Board of Directors may at any time authorize the issuance of additional common or preferred stock without common stockholder approval, subject only to the total number of authorized common and preferred shares set forth in our certificate of incorporation. The terms of equity securities issued by us in future transactions may be more favorable to new investors, and may include dividend and/or liquidation preferences, superior voting rights and the issuance of warrants or other derivative securities, which may have a further dilutive effect. Also, the future issuance of any such additional shares of common or preferred stock or other securities may create downward pressure on the trading price of the common stock. There can be no assurance that any such future issuances will not be at a price (or exercise prices) below the price at which shares of the common stock are then traded.

 

We do not anticipate declaring any cash dividends on our common stock.

 

We do not anticipate declaring any cash dividends on our common stock and the terms of our outstanding debted currently prohibit the payment of cash dividends on our common stock.

 

We will continue to incur the expenses of complying with public company reporting requirements.

 

We have an obligation to continue to comply with the applicable reporting requirements of the Securities Exchange Act of 1934, or the Exchange Act, which includes the filing with the SEC of periodic reports, proxy statements and other documents relating to our business, financial conditions and other matters, even though compliance with such reporting requirements is economically burdensome.

 

Pursuant to the terms of a November 2013 financing, the occurrence of certain events may require us to pay cash to holders of certain notes and warrants, and we may not have sufficient working capital to make such cash payments.

 

Upon the occurrence of certain events, including but not limited to the following, we may be required to make a payment in cash to the holders of certain notes:

 

 

upon maturity of the notes on November 13, 2014, if not otherwise redeemed or converted;

 

upon a change in control (as defined in the notes);

 

upon an events of default (as defined in the notes), including our failure to pay any amount of principal, default interest, late charges or other amounts when due, after applicable cure periods;

 

if shares issuable upon conversion of the notes or exercise of certain warrants are not registered for resale on an effective registration statement or are otherwise not freely tradable under any state or federal securities laws; and

 

our failure to issue shares of common stock upon conversion of the notes or upon exercise of the warrants on a timely basis.

  

We may not have sufficient working capital to make such cash payments, or to the extent we are able to make such cash payments, it will reduce the amount of working capital we have to operate our business.

 

Anti-dilution and other provisions in outstanding notes and warrants may also adversely affect our stock price or our ability to raise additional financing.

 

The notes and warrants that we issued in the November 2013 financing contain anti-dilution provisions that provide for adjustment of the conversion price of the notes and the exercise price of the warrants under certain circumstances. If we issue or sell shares of our common stock, or securities convertible into our common stock, at prices below the conversion price or exercise price, as applicable, the conversion price of the notes will be reduced and the exercise price of the warrants will be reduced and the number of shares issuable under the warrants will be increased. The amount of such adjustment if any, will be determined pursuant to a formula specified in the notes and the warrants and will depend on the number of shares issued and the offering price of the subsequent issuance of securities. Adjustments to the notes and warrants pursuant to these anti-dilution provisions may result in significant dilution to our existing stockholders and may adversely affect the market price of our common stock. The anti-dilution provisions may also limit our ability to obtain additional financing on terms favorable to us.

 

Moreover, we may not realize any cash proceeds from the exercise of the warrants. A holder of warrants may opt for a cashless exercise of all or part of the warrants under certain circumstances. In a cashless exercise, the holder of a warrant would make no cash payment to us, and would receive a number of shares of our common stock having an aggregate value equal to the excess of the then-current market price of the shares of our common stock issuable upon exercise of the warrant over the exercise price of the warrant. Such an issuance of common stock would be immediately dilutive to other stockholders.

  

 
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The gross amount of funds realized under the November 2013 financing may be affected by the requirement that a portion of the purchase price be maintained in restricted bank accounts controlled by the Company, as well as the limitation on the percentage of beneficial ownership by the holders.

 

On November 13, 2013, we issued notes with an original issue discount of approximately 10%, and an aggregate purchase price of $1,650,000. The notes are non-interest bearing, unless we are in default on the notes, in which case they carry an interest rate of 18% per annum, compounded monthly, until the applicable default is cured. Notwithstanding the purchase price of $1,650,000, $150,000 of the purchase price was be deemed paid at the closing by the cancellation of $150,000 of obligations owed by the Company to the placement agent for placement agency fees in connection with the financing, therefore the cash portion of the purchase price is $1,500,000, less $115,000 that we were required to pay to cover the investors’ legal fees in connection with the financing. 

 

On November 13, 2013, $750,000 of the gross proceeds from the sale of the notes was placed into restricted bank accounts in the Company’s name in an amount proportionate to each holder’s principal note balance.  In addition, we were required to place $75,000 of the gross proceeds we received into a restricted bank account to cover one-half of the placement agent’s fee, although this requirement was subsequently waived.  In addition, we were required to place any proceeds from the sale of certain marketable securities that we owned into the restricted bank accounts in an amount proportionate to each holder’s principal note balance.  Accordingly, in the fourth quarter of 2013, upon the sale of the marketable securities, we placed approximately $0.1 million in the bank restricted accounts.  The restricted funds will be applied to pay any redemption or other payment due under the applicable note to the applicable holder from time to time. A portion of the restricted funds will be released to us upon any conversion of the notes or at any time the balance in the applicable restricted account, excluding the proceeds from the sale of the marketable securities, exceeds the principal of the applicable note then outstanding.               

 

In addition, under the terms of the securities purchase agreement, the number of shares a holder, together with its affiliates, is able to beneficially own at any given time is limited to 4.99% of our total common stock then outstanding. If a holder’s beneficial ownership reaches the 4.99% limit, they will not be able to convert any remaining portion of their note (or exercise warrants that were issued in connection with the financing) until such time that they sell enough shares to reduce their ownership percentage.

 

These restrictions could limit the amount of proceeds we expect to realize from the financing. If we realize less than the full $1,500,000 cash portion of the purchase price of the notes, it will have a material adverse effect on our financial position, cash flows and our ability to continue operating as a going concern.

 

If we fail to maintain proper and effective internal controls, our ability to produce accurate financial statements could be impaired, which could adversely affect our operating results, our ability to operate our business and our stock price.

 

During the course of our testing of our internal controls, we may identify, and have to disclose, material weaknesses or significant deficiencies in our internal controls that will have to be remediated. Implementing any appropriate changes to our internal controls may require specific compliance training of our directors, officers and employees, and entail substantial costs in order to modify our existing accounting systems, which take a significant period of time to complete. Such changes may not, however, be effective in maintaining the adequacy of our internal controls, and any failure to maintain that adequacy, or consequent inability to produce accurate financial statements on a timely basis, could increase our operating costs and could materially impair our ability to operate our business. In addition, investors’ perceptions that our internal controls are inadequate or that we are unable to produce accurate financial statements may negatively affect our stock price

 

ITEM 2. PROPERTIES 

 

Our corporate headquarters is located in Delray Beach, Florida, where we occupy approximately 3,185 square feet of office space, under a lease that expires in May 2018. In addition, we occupy approximately 2,401 square feet of office space and 515 square feet of warehouse space in Plymouth, Minnesota under the terms of a verbal, month-to-month lease. Total monthly rent payments for these properties, including common area maintenance and real estate taxes, is approximately $8 thousand per month.

 

ITEM 3. LEGAL PROCEEDINGS 

 

We are involved in legal proceedings from time to time. See Note 12 to our consolidated financial statements for a discussion of our legal proceedings.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

 
16

 

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Our common stock is currently traded on the OTC Markets under the symbol “VTEQ.OTC Market.” The following table lists the high and low price for our common stock as quoted, in U.S. dollars, on the internet tracking services during each quarter within the last two fiscal years: 

 

Fiscal Year Ended December 31, 2013

 

High

   

Low

 

Quarter ended December 31, 2013

  $ 4.30     $ 1.51  

Quarter ended September 30, 2013

  $ 3.00     $ 0.90  

Quarter ended June 30, 2013

  $ 1.80     $ 0.60  

Quarter ended March 31, 2013

  $ 3.30     $ 1.20  

 

Fiscal Year Ended December 31, 2012

 

High

   

Low

 

Quarter ended December 31, 2012

  $ 2.70     $ 1.50  

Quarter ended September 30, 2012

  $ 2.70     $ 0.90  

Quarter ended June 30, 2012

  $ 3.90     $ 0.90  

Quarter ended March 31, 2012

  $ 4.80     $ 3.30  

 

The quotations set forth above reflect inter-dealer prices, without retail mark-up, mark-down or commission, and may not necessarily represent actual transactions. On April 10, 2014, the closing sale price of our common stock on the OTC Markets was $1.20 per share.

 

Holders

 

As of April 10, 2014, there were approximately 836 holders of record of our common stock, which number does not reflect beneficial stockholders who hold their stock in nominee or “street” name through various brokerage firms.      

 

Dividend Policy

 

Any determination with respect to the payment of dividends on our common stock will be at the discretion of our Board of Directors and will be dependent upon our financial condition, results of operations, capital requirements, general business conditions, terms of financing arrangements and other factors that our Board of Directors may deem relevant. We do not anticipate declaring any cash dividends on our common stock and our existing financing agreement currently prohibits the payment of cash dividends on our common stock while the obligations under the notes issued in the financing are outstanding.

 

Securities Authorized for Issuance Under Equity Compensation Plans 

 

During 2013, we converted 13.4 million stock options, which were previously granted under VAC’s stock plans, into options to acquire 2.6 million shares of VC’s common stock under the terms of the Exchange Agreement. The following table presents information regarding options and rights outstanding under our compensation plans as of December 31, 2013:

 

 

  

   

Equity Compensation Plan Information

 

Plan Category (1)

 

(a)
Number of securities to be issued upon exercise of outstanding options, warrants and rights

   

(b)
Weighted-average exercise price per share of outstanding options, warrants and rights

   

(c)
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))

 

Equity compensation plans approved by security holders

    2,624,356     $ 8.71       2,502,551  (2)

Equity compensation plans not approved by security holders (3)

    3,958       207.28       --  

Total

    2,628,314       9.01       2,502,551  

 

(1)  A narrative description of the material terms of our equity compensation plans is set forth in Note 7 to our accompanying consolidated financial statements.

(2)  Includes 1,215 shares available for future issuance under our 1999 Employees Stock Purchase Plan.

(3)  We have made grants outside of our equity plans and have outstanding options exercisable for shares of our Common Stock. These options were granted as an inducement for employment or for the rendering of consulting services. 

  

 
17

 

 

Recent Sales of Unregistered Securities / Recent Purchases of Securities

 

We did not repurchase any shares of our common stock during the year ended December 31, 2013. During the fourth quarter of 2013, we made the foregoing stock issuances that were not previously disclosed on a Current Report on Form 8-K. Each of the issuances was made in reliance upon the exemption from registration under Section 4(2) of the Securities Act of 1933, as amended.

 

 

1)

On October 21, 2013, we issued 33,333 shares of our common stock to CEOcast Inc. as consideration for consulting services. We valued these shares at $91,000.

 

2)

On November 8, 2013, we issued 30,000 shares of our common stock to MockingJay as consideration for consulting services. We valued these shares at $63,000.

 

 

3)

On November 11, 2013, we issued 100,000 shares of our common stock to Verge Consulting as consideration for consulting services. We valued these shares at $200,000.

 

ITEM 6. SELECTED FINANCIAL DATA

 

Not applicable because we are a smaller reporting company.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This Annual Report on Form 10-K contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that reflect our current estimates, expectations and projections about our future results, performance, prospects and opportunities. Forward-looking statements include, without limitation, statements about our market opportunities, our business and growth strategies, our projected revenue and expense levels, possible future consolidated results of operations, the adequacy of our available cash resources, our financing plans, our ability to pay dividends, our competitive position and the effects of competition and the projected growth of the industries in which we intend to operate. This Annual Report on Form 10-K also contains forward-looking statements attributed to third parties relating to their estimates regarding the size of the future market for products and systems such as our products, and the assumptions underlying such estimates. Forward-looking statements are only predictions based on our current expectations and projections, or those of third parties, about future events and involve risks and uncertainties.

 

Although we believe that the expectations reflected in the forward-looking statements contained in this Annual Report on Form 10-K are based upon reasonable assumptions, no assurance can be given that such expectations will be attained or that any deviations will not be material. In light of these risks, uncertainties and assumptions, the forward-looking statements, events and circumstances discussed in this Annual Report on Form 10-K may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Important factors that could cause our actual results, level of performance or achievements to differ materially from those expressed or forecasted in, or implied by, the forward-looking statements we make in this Annual Report on Form 10-K are discussed under “Item 1A. Risk Factors” and elsewhere in this Annual Report on Form 10-K and include:

 

 

our expectation that operating losses will continue for the foreseeable future, and that until we are able to achieve profits, we intend to continue to seek to access the capital markets to fund the development of our products;

 

that we intend to continue to explore strategic acquisition opportunities of businesses that are complementary to ours;

 

that our revenue from our Q Inside Safety Technology will continue to increase and that we will realize revenue from sales of our dosimeter products beginning in 2015;

 

that we will realize the full gross proceeds from the November 2013 financing;

 

that our ability to continue as a going concern is dependent upon our ability to obtain financing to fund our operations, the continued development of our products and our working capital requirements;

 

that if our products fail to gain market acceptance, we will be unable to achieve the necessary revenues which will allow us to remain in business;

 

that our products have certain technological advantages, but maintaining these advantages will require continual investment for development and in sales and marketing;

 

that we will need to raise additional funds in the near term to fund our operations and to achieve our future strategic objectives and that we may not be able to obtain additional debt or equity financing on favorable terms, if at all;

 

that we are in substantial compliance with all FCC requirements applicable to our products and systems;

 

that if any of our manufacturers or suppliers were to cease supplying us with system components, we would be able to procure alternative sources without material disruption to our business, and that we plan to continue to outsource any manufacturing requirements of our current and under development products;

 

that any amount is owed under the terms of the manufacturing agreement with our subsidiary, Signature Industries Limited and that we will have the funds necessary to pay amounts that may become due as a result of the liquidation of Signature Industries Limited, which is in process;

 

our ability to maintain compliance with the provisions of the notes and warrants and related agreements from the November 2013 financing; 

 

that we believe that we will have the financial ability to make all payments with respect to the November 2103 financing; and

 

that we will have the funds necessary to pay the liability for uncertain tax position in the event we are not successful in abating, reducing or negotiating installment payments for the liability; and

 

our expectations and expected trends with respect to the potential microtransponder revenue and scanner revenue for the breast implant, vascular port and artificial joint markets.

   

 
18

 

 

These forward-looking statements are based upon information currently available to us and are subject to a number of risks, uncertainties, and other factors that could cause our actual results, performance, prospects, or opportunities to differ materially from those expressed in, or implied by, these forward-looking statements. Important factors that could cause our actual results to differ materially from the results referred to in the forward-looking statements include the following as well as the factors under “Risk Factors”:

 

  

 

our ability to fund our operations and continue as a going concern;

 

  

  

our ability to have excess cash available for future actions;

 

 

 

anticipated trends in our business and demographics;

 

 

 

relationships with and dependence on technological partners;

 

 

 

our future profitability and liquidity;

 

 

 

our ability to preserve our intellectual property and trade secrets and operate without infringing on the proprietary rights of third parties;

 

 

 

regulatory, competitive or other economic influences;

 

 

 

our operational strategies including, without limitation, our ability to develop or diversify into new businesses;

 

 

 

our expectation that we will not suffer costly or material product liability claims and claims that our products infringe the intellectual property rights of others;

 

 

 

our ability to comply with current and future regulations relating to our businesses;

 

  

  

our inability to obtain the funds necessary to fund our operations;

 

 

 

the impact of new accounting pronouncements;

 

 

 

our ability to establish and maintain proper and effective internal accounting and financial controls;

 

  

  

the potential of further dilution to our common stock based on transactions effected involving issuance of shares;

 

  

  

volatility in our stock price; 

 

  

  

our ability to add employees during 2014 as we begin to ship our products and to grow our business;

 

  

  

our ability to continue to execute all required filings, tax returns, maintain insurance and perform other required activities to maintain our standing as a publicly-trading company;

 

  

  

that our results of operations are not materially impacted by moderate changes in the inflation rate;

 

  

  

that in order to have the funds necessary to develop and market our technology products we will need to raise additional capital; and

 
   

our actual results may differ materially from those reflected in forward-looking statements as a result of (i) the risk factors described under the heading “Risk Factors” beginning on page 11 of this Annual Report and in our other public filings, (ii) general economic, market or business conditions, (iii) the opportunities (or lack thereof) that may be presented to and pursued by us, (iv) competitive actions by other companies, (v) the impact on our business from the sales of DARC and the mobile games business, (vi) expectation about the outcome of the liquidation of Signature which subsequently occurred after the period covered by this Annual Report, (vii) the impact of the VeriTeQ acquisition on our financial condition, results of operations and cash flows, (viii) changes in laws, and (ix) other factors, many of which are beyond our control.

 

 

Forward-looking statements include all statements that are not historical facts and can be identified by forward-looking words such as “will likely result,” “are expected to,” “will continue,” “is anticipated,” “projects,” “target,” “goal,” “plans,” “objective,” “may,” “should,” “could,” “would,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “hopes,” and similar expressions intended to identify forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties (including those described under “Risk Factors” in this Annual Report) that could cause actual results to differ materially from estimates or forecasts contained in the forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this Annual Report. Other than as required by law, we do not undertake any obligation to publicly update or correct any forward-looking statements to reflect events or circumstances that subsequently occur or of which we hereafter become aware.

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying consolidated financial statements and related notes included in this Annual Report.

 

Overview 

 

During April 2013, VC’s and VAC’s board of directors began discussions to combine the companies as they believed that by combining the companies and focusing on the medical device industry would result in achievement of greater stockholder value. After several months of negotiation, on June 24, 2013, the companies entered into the Exchange Agreement and the VeriTeQ Transaction was closed on July 8, 2013.

  

 
19

 

 

As a result of the VeriTeQ Transaction, our operations now consist primarily of 13 U.S.-based corporate employees, and five board members, three of whom are non-employee board members. We added four employees during the fourth quarter of 2013 as we began to ship our products and two employees during the first quarter of 2014; our new chief legal and financial officer and a former consultant. Our plan is to outsource our manufacturing operations and to maintain a lean organizational structure.     

 

Our headquarters is located in Delray Beach, Florida. We expect to continue to execute all required filings, tax returns and perform other required activities to maintain our standing as a publicly-traded company. Also see the discussion below under the heading Liquidity and Capital Resources, which discusses our expectations regarding liquidity and our ability to continue as a going concern.

 

Impact of Recently Issued Accounting Standards 

 

For information regarding recent accounting pronouncements and their expected impact on our future consolidated results of operations or financial condition, see Note 1 to our accompanying consolidated financial statements.

 

Results of Operations

 

Our consolidated operating activities used cash of $1.9 million and $0.3 million during the years ended December 31, 2013 and 2012, respectively. As of December 31, 2013, our cash on hand totaled $13 thousand compared to $0.2 million as of December 31, 2012. As of December 31, 2013, our stockholders’ deficit was $11.0 million, as compared to a deficit of $38 thousand as of December 31, 2012, and as of December 31, 2013, we had an accumulated deficit of $16.7 million. Our consolidated net loss was $15.1 million and $1.6 million for the years ending December 31, 2013 and 2012, respectively, and $16.7 million from inception (December 14, 2011) to December 31, 2013.

 

Our profitability and liquidity depend on many factors, including our ability to successfully develop and bring to market our products and technologies the maintenance and reduction of expenses, and our ability to protect the intellectual property rights of VeriTeQ and others that we may acquire.

 

Critical Accounting Policies and Estimates 

 

Listed below are descriptions of the accounting policies that our management believes involve a high degree of judgment and complexity, and that, in turn, could materially affect our consolidated financial statements if various estimates and assumptions were changed significantly. The preparation of our consolidated financial statements requires that we make certain estimates and judgments that affect the amounts reported and disclosed in our consolidated financial statements and related notes. We base our estimates on historical experience and on other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. For more detailed information on our significant accounting policies, see Note 1 to our accompanying consolidated financial statements.

 

Use of Estimates  

 

The preparation of financial statements in conformity with generally accepted accounting principles, or GAAP in the United States of America, or U.S., requires management to make certain estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates are based on the knowledge of current events and actions we may undertake in the future, they may ultimately differ from actual results. Included in these estimates are assumptions used in: (i) determining the lives of long-lived assets; (ii) Black-Scholes-Merton, or BSM, valuation models used to estimate the fair value of stock-based compensation and warrants; (iii) determining the value of a promissory note with an embedded convertible option; (iv) the amount of beneficial conversion feature of convertible debt; (v) the liability for royalty obligations; and (vi) determining valuation allowances for deferred tax assets, among other items.

 

Revenue Recognition 

 

We follow specific and detailed guidelines in measuring revenue; however, certain judgments affect the application of our revenue policy. The complexity of the estimation process and all issues related to the assumptions, risks and uncertainties inherent with our revenue recognition policies affect the amounts reported in our financial statements. A number of internal and external factors affect the timing of our revenue recognition, including estimates of customer service/warranty periods, estimates of customer returns and the timing of customer acceptance. Our revenue results are difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause our operating results to vary significantly from quarter to quarter and year to year.

 

Principles of Consolidation

 

We consolidate all subsidiaries in which we hold a greater than 50% voting interest, which requires that we include the revenue, expenses, assets and liabilities of such subsidiaries in our financial statements. As of December 31, 2013, we owned 100% of our active subsidiaries.

 

 
20

 

 

Stock-Based Compensation 

 

At December 31, 2013, we had five stock-based employee compensation plans. On July 8, 2013 in connection with the Exchange Agreement, we established the DAC 2013 Stock Plan, which became effective on October 18, 2013, upon effectiveness of the Reverse Stock Split. On October 18, 2013, the outstanding stock options under the three VAC’s stock plans were converted into options to acquire VC’s common stock under the DAC 2013 Stock Plan and VAC’s three former stock plans were terminated. In accordance with the Compensation – Stock Compensation Topic of the Codification, awards granted are valued at fair value and compensation cost is recognized on a straight line basis over the service period of each award.

 

Income Taxes 

 

We adopted Accounting Standards Codification subtopic 740-10, Income Taxes, or ASC 740-10, which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statement or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Temporary differences between taxable income reported for financial reporting purposes and income tax purposes consist primarily of timing differences such as amortization of intangible assets, deferred officers' compensation and stock-based compensation. A valuation allowance is provided against net deferred tax assets where we determine realization is not currently judged to be more likely than not. We recognize and measure uncertain tax positions through a two-step process in accordance with the Income Taxes Topic of the Codification. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. We consider many factors when evaluating and estimating tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes. Accordingly, we report a liability for unrecognized tax benefits resulting from the uncertain tax positions taken or expected to be taken in a tax return and recognize interest and penalties, if any, related to uncertain tax positions in income tax expense.

 

As of December 31, 2013, we had an aggregate valuation allowance against all of our U. S. net deferred tax assets of approximately $2.9 million and we had U.S. net operating loss carryforwards of $5.1 million.

 

The amount of any benefit from our U.S. net operating loss carryforward is dependent on our ability to generate future taxable income and the unexpired amount of net operating loss carryforwards available to offset amounts payable on such taxable income. Any greater than a fifty percent change in ownership under IRC section 382 places significant annual limitations on the use of our U.S. net operating losses to offset any future taxable U.S. income we may generate. Based on the cumulative three-year change in ownership, VC exceeded the fifty percent threshold during 2013 as a result of the VeriTeQ acquisition, and accordingly, VC’s net operating losses realized prior to July 8, 2013 have been severely limited. In addition to the VeriTeQ acquisition, certain other transactions could cause an additional ownership change in the future, including (a) additional issuances of shares of common stock by us or (b) acquisitions or sales of shares by certain holders of our shares, including persons who have held, currently hold, or accumulate in the future five percent or more of our outstanding stock. See Note 8 to the accompanying consolidated financial statements for further information concerning our income taxes.

 

Loss Per Common Share and Common Share Equivalent 

 

Basic and diluted loss per common share has been computed by dividing the loss by the weighted average number of common shares outstanding for the period. Since we have incurred losses attributable to common stockholders, diluted loss per common share has not been computed by giving effect to all potentially dilutive common shares that were outstanding during the period. Dilutive common shares consist of incremental shares issuable upon exercise of stock options, warrants and convertible notes payable to the extent that the average fair value of our common stock for each period is greater than the exercise/conversion price of the derivative securities.

 

Results of Operations from Continuing Operations 

 

We are a development stage company through December 31, 2013. We recorded approximately $18 thousand of revenue from sales of our Q Inside Safety Technology product during the fourth quarter of 2013 under the terms of a development and supply agreement. During 2012, we acquired the assets related to our implantable medical device identification and radiation dose measurement technologies for the healthcare industry. Each of the acquisitions is more fully discussed in the footnotes to the accompanying consolidated financial statements.      

 

 
21

 

 

Year Ended December 31, 2013 Compared to December 31, 2012

 

Revenue and Gross Profit

 

We generated $18 thousand of revenue and $11 thousand of gross profit during 2013 related to the sale of our Q Inside Safety Technology product. We did not generate any revenue and gross profit during 2012. We expect our revenue to continue to increase during 2014 and beyond as we fulfill orders under our exiting development and supply contract with Establishment Labs and as we obtain new customers. During 2014, we expect the majority of revenue generated to be related to sales our Q Inside Safety Technology products for the breast implant market. We hope to begin realizing revenue from sales of our dosimeter products beginning in 2015.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expense was $6.0 million for the year ended December 31, 2013, including $0.4 million of transaction expenses related to the Exchange Agreement and approximately $2.0 million of non-cash compensation expense associated with stock options and a restricted stock grant. Selling, general and administrative expense was $2.1 million for the year ended December 31, 2012. The $3.9 million increase in selling, general and administrative expense was due primarily to the increase in non-cash compensation expense associated with stock options and restricted stock grants of approximately $1.7 million, higher salary and bonuses as we increased efforts in commercializing our Q Inside Safety Technology products, additional investor relations fee and transaction expenses related to the Exchange Agreement, partially offset by a reduction in legal fees as we incurred additional legal fees in 2012 related to the acquisition of our dosimeter technology. We expect our selling, general and administrative expenses to remain at the 2013 levels during 2014 and to increase in future years as we grow our business.

 

Depreciation and Amortization Expense

 

We incurred $0.6 million and $0.2 million of amortization expense for the years ended December 31, 2013 and 2012, respectively. The expense related primarily to technology, customer relationship and trademarks resulting from two acquisitions during 2012. We expect depreciation and amortization expense to remain at the current levels during 2014 and for the expense to increase in future years as we expand our business operations.

 

Other Expense

 

Other expense was $4.2 million for the year ended December 31, 2013 and nil for the year ended December 31, 2012. Approximately $2.8 million of other expense relates to the revaluation of a promissory note with an embedded convertible option to fair value. The note was entered into in December 2012 in connection with the acquisition of our dosimeter technology. Approximately $1.3 million of the expense related to the valuation/revaluation of common stock warrants issued on November 13, 2013, as the warrants are required to be revalued each reporting period, and approximately $0.1 million relates to a realized loss on the sale of marketable securities. As long as the promissory note with an embedded convertible option and the common stock warrants remain outstanding, other income (expense) will continue to fluctuate each reporting period due to changes in the value of our common stock price with increases in our stock price resulting in additional expense and reductions in our stock price resulting in a decrease in previously recorded expense.

 

Interest Expense

 

Interest expense was $4.3 million and $0.1 million for the years ended December 31, 2013 and 2012, respectively. The interest expense for the year ended December 31, 2013 relates primarily to a financing with several investors that we entered into in November 2013. Of the $4.3 million of expense in 2013, approximately $3.9 million is non-cash interest expense, compared to non-cash interest expense of approximately $0.1 million in 2012. Included in interest expense for the year ended December 31, 2013 in connection with the November 2013 financing is: (i) the accretion of debt discount of approximately $0.2 million; (ii) $3.2 million of discount associated with the fair value of the warrants issued in connection with the financing; and (iii) the amortization of financing costs of $0.4 million. The remaining interest expense for 2013 and the interest expense for 2012 relate to additional notes payable issued in 2013 and 2012 for an acquisition and working capital purposes. If we enter into additional convertible debt financings, which include the issuances of warrants and beneficial conversion features, or if we modify the terms of our existing convertible debt and warrants we may be required to record significant interest expense in future periods.

 

Benefit for Income Taxes

 

The income tax benefit of $0.8 million for the year ended December 31, 2012 resulted from the utilization of deferred tax assets to offset a deferred tax liability associated with the PAH acquisition in January 2012. We have incurred losses and therefore have provided a valuation allowance against our remaining net deferred tax assets at December 31, 2013 and 2012. We have recorded a liability for uncertain tax position of approximately $0.1 million, which is included in accrued expenses at December 31, 2013. The uncertainty is due to the late filing of VC“s federal income tax return for the year ended December 31, 2010 and another late filing penalty. We are appealing the penalties and are hoping that the penalties will be abated or significantly reduced.

 

 
22

 

  

Net Loss

 

The net loss was $15.1 million for the year ended December 31, 2013 compared to a net loss of $1.6 million for the year December 31, 2012. The loss for 2013 resulted from the significant increase in interest expense, higher personnel costs as we continue our effort to commercialize our Q Inside Safety Technology products, higher non-cash compensation expenses associated with stock options and restricted stock grants, expensed incurred in connection with the Exchange Agreement, and other expense related to the revaluation of convertible debt and warrants, which are required to be revalued each reporting period. We also realized a benefit for income taxes for the year ended December 31, 2012, which further contributed to the increase in the loss for 2013. The loss for 2012 resulted from efforts in commercializing our Q Inside Safety Technology products, legal costs associated with the acquisition of the radiation dosimeter technology assets in December 2012 and increases in non-cash compensation, amortization and interest expense, which were partially offset by the benefit for income taxes.

 

Pro Forma Information

 

Our financial results include the results of VC since July 8, 2013, the closing date of the VeriTeQ Transaction. Unaudited pro forma results of operations for the years ended December 31, 2013 and 2012 are included below. Such pro forma information assumes that the acquisition had occurred as of January 1, 2012. This summary is not necessarily indicative of what our result of operations would have been had VC been a combined entity during such periods, nor does it purport to represent results of operations for any future periods.

 

(In thousands, except per share amounts)

 

Year Ended

December 31, 2013

   

Year Ended
December 31, 2012

 

Net operating revenue

  $ 18     $  

Net loss

  $ (15,453

)

  $ (3,958

)

 

 

Related Party Transactions

 

We have entered into a shared services agreement as well as certain promissory notes with related parties. Each of the related party transaction is more fully discussed beginning on page 39 of this Annual Report and in Notes 10 and 14 to the accompanying consolidated financial statements.

 

Environmental Action

 

We have been informed by the New Jersey Department of Environmental Protection that a subsidiary of a predecessor business sold a building in 2006 for which an environmental action has been claimed. The claim in being reviewed by the Company’s outside legal counsel. We have not yet determined the impact on our financial condition or cash flows, if any.

 

Changing Prices for Inflation

 

We believe that our results of operations are not materially impacted by moderate changes in the inflation rate. Inflation and changing prices did not have a material impact on our operations in 2013 and 2012.

 

LIQUIDITY AND CAPITAL RESOURCES

 

As of December 31, 2013, cash totaled $13 thousand compared to approximately $0.2 million at December 31, 2012.

 

Net cash used in operating activities totaled $1.9 million in 2013 and $0.3 million in 2012. In 2013, cash was used primarily to fund selling, general and administrative expenses. In 2012, cash was used to fund selling, general and administrative expenses.

 

Net cash provided by investing activities was $0.9 million in 2013, due to cash of $0.8 million provided by the acquisition of VC in July 2013 and $0.1 million, which was provided by the sale of marketable securities. No cash was used or provided by investing activities in 2012.

 

Net cash provided by financing activities totaled approximately $0.8 million in 2013 and $0.5 million in 2012. Cash was provided by the increase of notes payable and the issuance of common stock to investors offset by the $0.9 million increase in unrestricted cash. 

  

 
23

 

 

Adjustments to reconcile operating losses to net cash used in operating activities included the following:

 

Accounts payable increased to $0.9 million at December 31, 2013 from $0.1 million at December 31, 2012. The increase is due to transaction expenses associated with the Exchange Agreement, which have not yet been paid accounts payable associated with the acquisition of VC on July 8, 2013, legal fees and other costs associated with the November 2013 financing and other payables for selling, general and administrative expenses, including legal and accounting fees. We expect accounts payable to increase going forward until such time as we raise enough capital to pay the outstanding invoices, as well as a result of expanded efforts to commercialize our products.

 

Accrued expenses increased to $2.7 million at December 31, 2013 from $1.1 million at December 31, 2012. The increase is due primarily to higher accrued payroll costs as certain employees are deferring their salaries and all bonuses are being deferred, accrued expenses associated with the acquisition of VC on July 8, 2013 and an increase in legal costs associated with patent review and maintenance. We expect our accrued expenses to continue to increase until such time as we are able to raise enough capital to pay the deferred payroll and other accrued costs.

 

The liability to a related party under the shared services agreement increased to $0.2 million at December 31, 2013 from $0.1 million at December 31, 2012. The increase is due to services provided during for first half of 2013. VeriTeQ terminated the shared services agreement effective July 8, 2013.

 

As we intend to outsource the manufacture of our Q Inside Safety Technology and other products, and to maintain “just-in-time” inventory levels, we do not currently anticipate having to make significant investments in fixed assets or inventory.

 

Liquidity

 

We are in the development stage, have incurred operating losses since our inception and we had a working capital deficit of approximately $3.1 million as of December 31, 2013. This compares to a working capital deficiency of approximately $1.4 million at December 31, 2012. These factors raise substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from this uncertainty.      

 

Financing is required to meet our liquidity needs. On November 13, 2013, we entered into a financing, which is more fully discussed in Note 5 to the accompanying consolidated financial statements. However, the funds generated from the financing to date have been limited due to the requirement that a significant portion of the proceeds be held in restricted bank accounts. At April 10, 2014, approximately $0.7 million the proceeds from the November 13, 2013 financing, which includes approximately $0.1 million from the sale of the MGT common stock, is still held in the restricted bank accounts. In addition to the November 13th financing, since December 31, 2013 to April 10, 2014, we have received approximately $0.5 million from the issuances of other promissory notes of which $0.2 million was from related parties. In order to have the funds necessary to pay: (i) existing accounts payable and accrued expenses; (ii) our notes payable that are due on demand or due within the next twelve months and, in particular, the promissory notes issued on November 13, 2013, which if not converted into common stock mature on November 13, 2014; (iii) the liability under the shared services agreement; and (iv) commitments for capital expenditures, as well as to develop and market our technology products, we need to raise additional capital. We do not know whether such additional capital will be available to us or, if it is available, we do not know if the terms of any financing will be favorable or even acceptable.

 

Our goal is to achieve profitability and to generate positive cash flows from operations. Our capital requirements depend on a variety of factors, including: (i) our ability to realize in full the proceeds under the November 13, 2013 financing discussed above and whether the notes issued in the November 13, 2013 financing will be converted to stock or be required to be repaid in cash on the maturity date; (ii) the cash required to service our other outstanding debt and in particular those promissory notes that are due on demand; (iii) the cash that will be required to fund our business operations, including the purchasing of capital expenditures related to molds and testing equipment for our Q Inside Safety Technology products; and (iv) the cash required to pay our existing accounts payable and accrued expenses, most of which are past due and/or on extended payment terms, among other items. Our commitments for capital expenditures as of December 31, 2013 are approximately $0.1 million. Failure to raise capital to fund our operations and to generate positive cash flow from such operations will have a material adverse effect on our financial condition, results of operations and cash flows and could result in our inability to continue operations as a going concern.

 

Our historical sources of liquidity have included proceeds from the sale of businesses and assets, the sale of common stock, proceeds from the issuance of debt, including promissory notes issued to related parties, a shared services agreement with a related party, the deferral of certain salary and bonuses payments to our senior executives and extended payment terms with certain of our vendors. In addition to these sources, other sources of liquidity may include the raising of capital through additional private placements or public offerings of debt or equity securities, the exercise of stock options, as well as joint ventures. However, going forward some of these sources may not be available, or if available, they may not be on favorable terms. If we were unable to obtain the funds necessary to fund our operations, it would have a material adverse effect on our financial condition, results of operations and cash flows and could result in our inability to continue operations as a going concern. These conditions indicate that there is substantial doubt about our ability to continue operations as a going concern, as we may be unable to generate the funds necessary to pay our obligations in the ordinary course of business. The accompanying financial statements do not include any adjustments related to the recoverability and classification of asset carrying amounts and classification of liabilities that may result from the outcome of this uncertainty.

  

 
24

 

 

Inflation

 

We do not believe that inflation has had a material effect on our Company's results of operations.

 

Off-Balance Sheet Arrangements

 

We had no off-balance sheet arrangements for the year ended December 31, 2013.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 

 

Not applicable because we are a smaller reporting company.

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Our consolidated financial statements included in this Annual Report are listed in Item 15 and begin immediately after the signature page.

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 

 

None.

 

ITEM 9A. CONTROLS AND PROCEDURES 

 

Evaluation of Disclosure Controls and Procedures. 

 

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as of the end of the period covered by this report (the “Evaluation Date”). Based upon the evaluation, our principal executive officer and principal financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective. Disclosure controls are controls and procedures designed to reasonably ensure that information required to be disclosed in our reports filed under the Exchange Act, such as this report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls include controls and procedures designed to reasonably ensure that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure. Our quarterly evaluation of disclosure controls and procedures includes an evaluation of some components of our internal control over financial reporting, and internal control over financial reporting is also separately evaluated on an annual basis for purposes of providing the management report which is set forth below.

 

Report of Management on Internal Control Over Financial Reporting. 

 

Our management is responsible for establishing and maintaining a comprehensive system of internal control over financial reporting to provide reasonable assurance of the proper authorization of transactions, the safeguarding of assets and the reliability of the financial records. Our internal control system was designed to provide reasonable assurance to our management and board of directors regarding the preparation and fair presentation of published financial statements. The system of internal control over financial reporting provides for appropriate division of responsibility and is documented by written policies and procedures that are communicated to employees. The framework upon which management relied in evaluating the effectiveness of our internal control over financial reporting was set forth in Internal Controls — Integrated Framework published in 1992 by the Committee of Sponsoring Organizations of the Treadway Commission.

 

Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the U.S. Our internal control over financial reporting includes those policies and procedures that:

 

 

(i)

 

pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

 

(ii)

 

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the U.S., and that our receipts and expenditures are being made only in accordance with authorization of our management and directors; and

 

(iii)

 

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements.

 

Based on the results of our evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2013. Because of its inherent limitation, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in our business or other conditions, or that the degree of compliance with our policies or procedures may deteriorate.

 

Inherent Limitations of Disclosure Controls and Procedures and Internal Control over Financial Reporting 

 

There are inherent limitations to the effectiveness of any control system. A control system, no matter how well conceived and operated, can provide only reasonable assurance that its objectives are met. No evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or because the degree of compliance with the policies and procedures may deteriorate.

 

 
25

 

 

Changes in Internal Control over Financial Reporting. 

 

There were no changes in our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) during the quarter ended December 31, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.  

 

ITEM 9B. OTHER INFORMATION

 

We have entered into the following promissory notes during the quarter ended December 31, 2013 that we have not previously disclosed on a Current Report on Form 8-K:

 

 

On October, 11, 2013, we entered into a promissory note with our CEO, Scott Silverman, wherein Mr. Silverman loaned the Company the principal amount of $80,000. The note bears interest at 5% per annum and is due on demand. We have repaid $75,000 of this note leaving a current balance outstanding balance of $5,000 as of April 15, 2014. 


 

On October, 29, 2013, we entered into a promissory note with our CEO, Scott Silverman, wherein Mr. Silverman loaned the Company the principal amount of $30,000. The note bears interest at 5% per annum and is due on demand.

 

We have entered into the following promissory notes subsequent to December 31, 2013 that we have not previously disclosed in a Current Report on Form 8-K:

 

 

On January 15, 2014, the Company entered into a promissory note with our President, Randolph Geissler, wherein Mr. Geissler loaned the Company the principal amount of $40,000. The note bears interest at 5% per annum and is due on demand.

 

 

On January 15, 2014, the Company entered into a promissory note with our Chairman of the Board and CEO, Scott Silverman, wherein Mr. Silverman loaned the Company the principal amount of $60,000. The note bears interest at 5% per annum and is due on demand. On April 7, 2014, $8,500 of the note was repaid leaving a current balance of $51,500 outstanding.

  

 

On March 4, 2014, the Company entered into a promissory note with our director, Daniel Penni, wherein Mr. Penni loaned the Company the principal amount of $25,000. The note bears interest at 5% per annum and is due on demand.

 

 

On March 5, 2014, the Company entered into a promissory note with Deephaven Enterprises, Inc. wherein Deephaven Enterprises, Inc. loaned the Company the principal amount of $25,000. The note bears interest at 9% per annum and matures on March 5, 2015. At any such time as would not cause a change to, or a right to change, the economics of any outstanding warrants or other debt, the note shall be automatically amended to allow the holder to convert the note, or any part thereof, into validly issued, fully paid and non-assessable shares of common stock of the Company. The number of shares of common stock issuable upon conversion of any conversion amount shall be determined by dividing (x) such conversion amount by (y) the conversion price. Conversion amount means the sum of (x) portion of the principal to be converted, redeemed or otherwise with respect to which this determination is being made and (y) all accrued and unpaid interest with respect to such portion of the principal amount. Conversion price means, as of any conversion date or other date of determination, $0.35, adjusted for any stock splits, reverse stock splits or similar transactions.

 

 

On March 6, 2014, the Company entered into a promissory note with James Rybicki Trust where James Rybicki Trust loaned the Company the principal amount of $25,000. The note bears interest at 9% per annum and matures on March 6, 2015. At any such time as would not cause a change to, or a right to change, the economics of any outstanding warrants or other debt, the note shall be automatically amended to allow the holder to convert the note, or any part thereof, into validly issued, fully paid and non-assessable shares of common stock of the Company. The number of shares of common stock issuable upon conversion of any conversion amount shall be determined by dividing (x) such conversion amount by (y) the conversion price. Conversion amount means the sum of (x) portion of the principal to be converted, redeemed or otherwise with respect to which this determination is being made and (y) all accrued and unpaid interest with respect to such portion of the principal amount. Conversion price means, as of any conversion date or other date of determination, $0.35, adjusted for any stock splits, reverse stock splits or similar transactions.

 

 

On March 10, 2014, the Company entered into a promissory note with the CEO of PSID, William Caragol, wherein Mr. Caragol loaned the Company the principal amount of $25,000. The note matures on March 10, 2015, bears interest at the rate of 9% per annum and can be prepaid without penalty. At any such time as would not cause a change to, or a right to change, the economics of any outstanding Warrants or Other Debt (as defined in the note) of the Company, the note shall be automatically amended to allow the holder to convert the note, or any part thereof, into validly issued, fully paid and non-assessable shares of common stock of the Company in accordance with the following provisions: (i)  the number of shares of common stock issuable upon conversion of any Conversion Amount shall be determined by dividing (x) such Conversion Amount by (y) the Conversion Price (the “Conversion Rate”). “Conversion Amount” means the sum of (x) portion of the principal to be converted, redeemed or otherwise with respect to which this determination is being made and (y) all accrued and unpaid interest with respect to such portion of the principal amount. “Conversion Price” means, as of any Conversion Date or other date of determination, 60% of the lowest closing bid price over the ten trading days immediately preceding the date of the delivery or deemed delivery of the applicable Conversion Notice. All such determinations to be appropriately adjusted for any share dividend, share split, share combination, reclassification or similar transaction that proportionately decreases or increases the common stock during such 10-day calculation period.

  

 
26

 

 

 

On March 20, 2014, the Company entered into a promissory note with Deephaven Enterprises, Inc. wherein Deephaven Enterprises, Inc. loaned the Company the principal amount of $61,225. The note matures on March 20, 2015, bears interest at the rate of 9% per annum and can be prepaid without penalty. At any such time as would not cause a change to, or a right to change, the economics of any outstanding warrants or 0ther debt , certain warrants held by the Deephaven Enterprises, Inc. or its owner: (i) would be amended to change the exercise price thereof to $.35 per shares; (ii) would allow the holder to tender the note at any time in lieu of payment of the exercise price on any warrants held by the holder or owner; and (iii) the Company will issue a new warrant to acquire 300,000 shares of the Company’s common stock at a price of $.35 per share. Notwithstanding anything in the note to the contrary, these are not valid or binding, and shall not be deemed to be a part of this note, so long as their existence would trigger a reduction in the exercise price or other change in the terms of any warrant issued by the Company to any person, other than to an officer or director, or would trigger a default or the change in the conversion or other economic terms under any indebtedness or securities or related agreements of the Company, or would give the holder of any such warrant or other debt the right to alternative pricing or economics as a result of the existence of the terms contained in this section. The provisions of this section are intended and shall be interpreted as to comply with and neither contravene nor trigger the provisions of Section 2 of the Warrants issued on November 13, 2013 and Section 7 of the Notes issued November 13, 2013.

 

PART III 

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Our directors, their ages and business experience, as of April 10, 2014, are set forth below:           

 

Name

Age

Position

 

 

 

Scott R. Silverman 

50

Chairman of the Board of Directors/Chief Executive Officer

 

 

 

Barry M. Edelstein

50

Director

 

 

 

Daniel E. Penni

66

Director

 

 

 

Michael E. Krawitz

44

Director/Chief Legal and Financial Officer

 

 

 

Shawn A. Wooden

40

Director

 

 

Scott R. Silverman

Mr. Silverman, age 50, has served as our chief executive officer and Chairman of our board of directors since July 2013. Previously, Mr. Silverman served as the chairman of the board of directors of PositiveID Corporation from November 2008 until December 2011, and as chief executive officer from August 2009 until August 2011. He previously served as chief executive officer of PositiveID Corporation, then known as VeriChip Corporation, from December 2006 through July 2008, as chairman of its board of directors from March 2003 through July 2008, and as a member of its board of directors from February 2002 through July 2008. Mr. Silverman served as the chairman of Steel Vault Corporation from January 2006 until November 2009. He also served as a member of the board of directors of Gulfstream International Group, Inc. from September to October, 2010. Mr. Silverman served as chief executive officer and chairman of the board of directors of the Company from March 2003 to December 2006, and chairman of Destron Fearing Corporation (then known as Digital Angel Corporation) a then majority-owned subsidiary of the Company from March 2003 to July 2007. Mr. Silverman is an attorney licensed to practice in New Jersey and Pennsylvania. Mr. Silverman was selected to serve as a director on our Board of Directors because of his specific experience and proven expertise in our industry, his past and continuing contributions to the Company, his general business expertise and his experience in leading publicly-held companies.

 

 

Barry M. Edelstein

Mr. Edelstein, age 50, has served as a member of our board of directors since July 2013. Mr. Edelstein served as managing partner of Structured Growth Capital, Inc., a boutique investment banking firm, since January 2009. Mr. Edelstein served as acting president and chief executive officer of Destron Fearing Corporation, a majority-owned subsidiary of ours (then known as Digital Angel Corporation) from August 2007 until December 2007, and he served on Destron Fearing Corporation’s board of directors from June 2005 to December 2007. Mr. Edelstein has served as the chairman of ScentSational Technologies, LLC since 2002. Mr. Edelstein served as President of GlobalCom Telecommunications, LLC which he co-founded in 1992 and which was acquired in 1997 by Comcast Corporation (NASDAQ:CMCSK), where he then served as a divisional vice president until 2002. Mr. Edelstein has a bachelor’s degree in business administration from Drexel University and received his law degree from Widener University School of Law. Barry Edelstein served as a member of the board of directors of PositiveID Corporation from January 2008 to June 2013. Mr. Edelstein was nominated to the Board of Directors due to his past experience as president, interim chief executive officer and director of Destron Fearing Corporation, his past business experience and his knowledge of our industry.

  

 
27

 

 

Daniel E. Penni

Mr. Penni, age 66, has served as a member of our board of directors since March 1995 and as chair of our Board of Directors from July 3, 2007 to July 7, 2013. From May 3, 2013 to July 7, 2013, he served as our interim chief executive officer and president. Mr. Penni also served as our interim chief executive officer and president from January 31, 2012 to August 23, 2012. From September 1988 until December 2005, Mr. Penni was employed by Arthur J. Gallagher & Co. (NYSE:AJG), an insurance brokerage and risk management services firm, where he served in several positions, including his final position as area executive vice president. He has worked in various sales and administrative roles in the insurance business since 1969. He also served on the board of trustees of the Massachusetts College of Pharmacy and Health Sciences in Boston from 1989 through June 2006 and served as the chair of finance, the corporate treasurer and the chair of the audit committee at various times during his service period. Mr. Penni graduated with a bachelor of science degree in 1969 from the School of Management at Boston College. Mr. Penni was a member of the board of directors of VeriChip Corporation, n/k/a PositiveID Corporation (which was a former subsidiary of ours) from June 2004 until January 2008. Mr. Penni was selected to serve as a director on our Board of Directors because of his specific experience and proven expertise in our industry, his past and continuing contributions to the Company, and his general expertise and perspective on our business.         

 

 

Michael E. Krawitz

Mr. Krawitz, age 44, has served as a member of our board of directors since July 2013. Mr. Krawitz was appointed our Chief Legal and Financial Officer effective January 31, 2014. Mr. Krawitz served as chief executive officer of PEAR, LLC, a provider of renewable energy and financing for renewable energy projects, from February 2011 to January 31, 2014. From July 2010 until February 2011, he served as chief executive officer of Florida Sunshine Investments I, Inc. He previously served as the chief executive officer and president of the Company from December 2006 to December 2007, executive vice president from March 2003 until December 2006, and as a member of the Company’s Board of Directors of directors from July 2007 until December 2007. Mr. Krawitz served as a member on the board of directors of Steel Vault Corporation from July 23, 2008 until November 11, 2009 and has served on the board of directors of PositiveID Corporation since November 2008. He practiced law at Fried, Frank, Harris, Shriver & Jacobson in New York from 1994 to 1999. Mr. Krawitz earned a bachelor of arts degree from Cornell University in 1991 and a juris doctorate from Harvard Law School in 1994.  Mr. Krawitz is a skilled executive with extensive capital markets experience. Mr. Krawitz was nominated to the Board of Directors due to his past experience as our chief executive officer as well as his experience as an attorney.

 

 

Shawn A. Wooden

Mr. Wooden, age 40, is currently a member of the board of directors of VeriTeQ. Mr. Wooden runs Wooden Wealth Strategies, a full-service financial services and investment boutique. He earned his bachelor of science from the University of Notre Dame in Computer Science. After graduation, he began a nine year career in the National Football League, where he played for the Miami Dolphins and the Chicago Bears. After retiring in 2005, Mr. Wooden transitioned into the financial services industry where he has earned the Financial Industry Regulation Authority (FINRA) Series 6, 7, 63, and 65 licenses, as well as the Life Underwriter Training Council Fellow (LUTCF) professional designation. Mr. Wooden also earned a Certificate for Retirement Planning from the Wharton School of Business in Pennsylvania. Mr. Wooden was nominated to the Board of Directors because of his financial and business experience.

 

Executive Officers

 

Our executive officers, their ages and business experience, as of February 5, 2014, are set forth below:      

 

Name

 

Age

 

Position

Scott R. Silverman

  

50

  

Chief Executive Officer

Randolph K. Geissler

  

53

  

President

Michael E. Krawitz

 

44

 

Chief Legal and Financial Officer

 

Scott R. Silverman

A summary of Mr. Silverman’s experience is set forth above.

 

 

Randolph K. Geissler

Mr. Geissler, 53, is currently the President of VeriTeQ. He also is currently the CEO of Geissler Corporation. Mr. Geissler previously served as the served as CEO of Geissler Technologies from 2004 to 2008 and as CEO of Destron Fearing Corporation (then known as Digital Angel Corporation) from 1993 to 2003. Mr. Geissler specializes in managing companies and technologies focused on RFID, and he a developer of the implantable microtransponder for animal identification.

 

 
28

 

 

Michael E. Krawitz    

A summary of Mr. Krawitz’s experience is set forth above.

 

There are no family relationships among our executive officers or directors.  

 

Currently, our Board of Directors consists of five directors. Our Board of Directors was structured to be divided into three classes, and a class is generally elected to serve for a three-year term or until the directors' successors are duly elected and qualified. Thus, it has been our historical practice (since 1998) to elect approximately one-third of the members of the Board of Directors annually. Directors may be removed only for cause. Any director appointed by our Board of Directors to fill a vacancy on the board serves the balance of the unexpired term of the class of directors in which the vacancy occurred. The roles and responsibilities of the Board of Directors are as set forth by Delaware corporate law, which includes providing general oversight of management and setting strategic direction for the Company.

 

CORPORATE GOVERNANCE

 

We have a standing Audit Committee, Compensation Committee and Nominating Committee of our board of directors. Each has a written charter approved by our Board.

 

Audit Committee

 

Our audit committee currently consists of Barry M. Edelstein and Shawn A. Wooden. Mr. Krawitz resigned from our audit committee effective January 30, 2014 in connection with his appointment as our Chief Legal and Financial Officer.  Mr. Edelstein chairs the audit committee. Our Board of Directors has determined that each of the current members of our audit committee is “independent,” as defined under, and required by, the federal securities laws and the rules of the SEC, including Rule 10A-3(b)(i) under the Exchange Act. Although we are no longer listed on the Nasdaq Capital Market, each of the members of our audit committee is “independent” under the listing standards of the Nasdaq Capital Market. Our Board of Directors has determined that Mr. Edelstein qualifies as an “audit committee financial expert” under applicable federal securities laws and regulations. A copy of the current audit committee charter is available on our website at www.veriteqcorp.com.    

 

The audit committee assists our Board of Directors in its oversight of:

  

our accounting, financial reporting processes, audits and the integrity of our financial statements;

  

our independent auditor’s qualifications, independence and performance;

  

our compliance with legal and regulatory requirements;

  

our internal accounting and financial controls; and

  

our audited financial statements and reports, and the discussion of the statements and reports with management, including any significant adjustments, management judgments and estimates, new accounting policies and disagreements with management.

 

The audit committee has the sole and direct responsibility for appointing, evaluating and retaining our independent auditors and for overseeing their work. All audit and non-audit services to be provided to us by our independent auditors must be approved in advance by our audit committee, other than de minimis non-audit services that may instead be approved in accordance with applicable rules of the SEC.

 

Code of Conduct and Corporate Ethics General Policy Statement 

 

Our Board of Directors has approved and we have adopted a Code of Business Conduct and Ethics, or the Code of Conduct, which applies to all of our directors, officers and employees. Our Board of Directors has also approved and we have adopted a Code of Ethics for Senior Financial Officers, or the Code for SFO, which applies to our chief executive officer, president and chief legal and financial officer and other officers. The Code of Conduct and the Code for SFO are available upon written request to VeriTeQ Corporation, Attention: Secretary, 220 Congress Park Drive, Suite 200, Delray Beach, Florida 33445. The audit committee of our Board of Directors is responsible for overseeing the Code of Conduct and the Code for SFO. Our audit committee must approve any waivers of the Code of Conduct for directors and executive officers and any waivers of the Code for SFO. 

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Exchange Act requires that our officers and directors and persons who own 10% or more of our common stock to file reports of ownership and changes in ownership with the SEC and furnish us with copies of all such reports. Based solely on a review of copies of such forms and written representations from our directors and executive officers, we believe that for the fiscal year of 2013, all of our directors and executive officers were in compliance with the disclosure requirements of Section 16(a). To our knowledge, based solely on our records, during the year ended December 31, 2013, SNC Holdings Corp, a more than 10% beneficial owner located in the United Kingdom, did not file a Form 3 or three Form 4s. SNC Holdings Corp is the holder of a promissory note issued by VeriTeQ Acquisition Corporation, which is convertible in shares of the Company’s common stock.   

  

 
29

 

 

ITEM 11. EXECUTIVE COMPENSATION

 

The following table sets forth information regarding compensation earned in or with respect to our fiscal year 2012 and 2013 by:

 

  

each person who served as our chief executive officer in 2013;

  

each person who served as our chief financial officer in 2013; and

 

our other most highly compensated executive officer who was serving at December 31, 2013.

  

We had no other executive officers during any part of 2013. We refer to these officers collectively as our named executive officers.            

 

Summary Compensation Table

 

Name and

Principal Position

Year

 

Salary

   

Bonus

   

Stock

Awards(6)

   

Option

Awards(7)

   

Non-Equity Incentive Plan Compensation

   

All Other Compensation

   

Total

 

Scott R. Silverman (1)

2013

  $ 330,000     $ 430,000     $     $ 537,007     $     $ 54,731  (8)   $ 1,351,738  

Chief Executive Officer

2012

    300,000       300,000                         47,595  (9)     647,595  

Randolph K. Geissler(2)

2013

  $ 200,000     $ 275,000     $ 1,350,000     $ 537,007     $     $     $ 2,362,007  

President

2012

    66,667                                     66,667  

Daniel E. Penni (3)

2013

  $     $     $     $     $     $     $  

Former Interim Chief

2012

                                         

Executive Officer and President

                                                         

Lorraine M. Breece (4)

2013

  $ 142,700     $ 50,000     $     $     $     $ 2,629  (10)   $ 195,329  

Former Chief Financial Officer

2012

    140,000       25,000             3,347             4,077  (11)     172,424  

L. Michael Haller (5)

2013

  $ 50,000     $     $             $     $ 18,646  (12)   $ 68,646  

Former Chief

2012

    52,658                   76,085             427  (13)     129,170  

Executive Officer and President

                                                         

 

  

(1)

Mr. Silverman was hired as our chief executive officer on July 8, 2013 in connection with the Share Exchange. The Share Exchange was treated as a reverse acquisition and, accordingly, we have included Mr. Silverman’s compensation in the table above for the twelve months ended December 31, 2013 and 2012. Mr. Silverman founded our subsidiary, VeriTeQ Acquisition Corporation, in December 2011. The portion of Mr. Silverman’s salary, bonus and option award earned by him from January 1, 2013 to July 7, 2013 was $171,875, $171,875 and $537,007, respectively. A portion of the 2013 Other Compensation was also earned by Mr. Silverman prior to the Share Exchange as noted in footnote 8 below.   

 

  

(2)

Mr. Geissler was hired as our president on July 8, 2013 in connection with the Share Exchange. The Share Exchange was treated as a reverse acquisition and, accordingly, we have included Mr. Geissler’s compensation in the table above for the twelve months ended December 31, 2013 and for the period September 1 to December 31, 2012. Mr. Geissler was hired by our subsidiary, VeriTeQ Acquisition Corporation, effective September 1, 2012. The portion of Mr. Geissler’s salary, bonus and option award earned by him from January 1, 2013 to July 7, 2013 was $104,167, $104,167 and $537,007, respectively.  

 

  

(3)

Mr. Penni was interim chief executive officer and president from January 31, 2012 to August 23, 2012 and from May 3, 2013 to July 7, 2013. Mr. Penni was also chairman of the Board of Directors during 2012 and from January 1, 2013 to July 7, 2013, and earned $45,935 of director fees for 2013, and $81,000 of director fees in 2012. In addition, Mr. Penni received 3,333 stock options in September 2012 for his services as a director. The option award was valued at $6,695 on the date of grant. These director fees and option award are not included in the compensation table above as the fees and options were awarded to Mr. Penni in his capacity as a member of our board of directors. Mr. Penni did not receive any compensation for his service as our interim chief executive officer and president during 2012 or 2013. Mr. Penni continues to serve as a member of our board of directors.  

 

  

(4)

Ms. Breece served as our chief financial officer from August 1, 2011 to January 30, 2014.  Effective January 31, 2014, Mr. Krawitz was appointed our chief legal and financial officer.     

  

 
30

 

 

  

(5)

Mr. Haller was appointed as chief executive officer effective August 23, 2012, and resigned as chief executive officer effective May 3, 2013.  

 

  

(6)

Mr. Geissler was granted 858,747 shares of restricted stock on January 1, 2013 under the terms of his employment agreement. The amount of compensation reflects the aggregate grant date fair value of the award computed in accordance with FASB ASC Topic 718. Also see the Outstanding Equity Awards Table as of December 31, 2013 presented on page 35 of this report.  

 

  

(7)

Messrs. Silverman and Geissler were each granted 381,655 stock options during 2013. The amount of compensation reflects the aggregate grant date fair value of the awards computed in accordance with FASB ASC Topic 718. For additional information on the valuation assumptions regarding the option awards, refer to Note 7 to our acompanying consolidated financial statements, which are included elsewhere in this report. Also see the Outstanding Equity Awards Table as of December 31, 2013 presented on page 35 of this report.   

 

  

(8)

Amount represents payments made for Mr. Silverman in 2013 in connection with Mr. Silverman’s employment agreement as follows: $37,500 for reimbursement of unallocable expenses, $5,000 for medical expense reimbursement, $3,587 for disability insurance, $1,238 for life insurance, $5,936 for personal use of a company car, and $1,470 for cellular telephone and internet service. As discussed in footnote 1 above, the following amounts were earned by Mr. Silverman during the period January 1 to July 7, 2013: $22,500 for reimbursement of unallocable expenses, $619 for life insurance, $1,716 for personal use of a company car, and $1,208 for cellular telephone and internet service.  

 

  

(9)

Amount represents payments made for Mr. Silverman in 2012 as follows: $45,000 for reimbursement of unallocable expenses, $309 for life insurance, $1,098 for personal use of a company car, and $1,188 for cellular telephone and internet service.

 

 

(10)

Amount represents $2,629 for Ms. Breece’s cellular telephone and internet services paid for during 2013.

 

 

(11)

Amount represents $4,077 for Ms. Breece’s cellular telephone and internet services paid for during 2012.

 

 

(12)

Amount represents $10,000 of severance paid to Mr. Haller under the terms of an amendment to his employment agreement, which is more fully discussed below under section titled “Executive Employment Arrangements with Former Named Executive Officers.” During 2013, Mr. Haller was also paid $7,951 for accrued vacation hours and $695 for cellular telephone and internet services.

 

 

(13)

Amount represents $427 for Mr. Haller’s cellular telephone and internet services paid for during 2012.

 

Narrative Disclosure to Summary Compensation Table and Additional Narrative Disclosure

 

Executive Employment Arrangements

 

Our 2013 and 2012 Incentive and Recognition Policies 

 

We did not establish an incentive and recognition plan for our named executive officers for 2012 and 2013. 

 

Potential Payments Upon Termination or Change in Control 

 

We had entered into employment agreements with certain of our former named executive officers that required us to make payments upon termination or a change in control of the Company. These arrangements are discussed below in the section “Executive Employment Arrangements with Former Named Executive Officers.”  

 

We have entered into employment agreements with Messrs. Silverman, Geissler and Krawitz. Previously, Messrs. Silverman and Geissler had employment agreements with VAC.    

  

 
31

 

 

Scott R. Silverman Employment Agreements

 

Effective January 1, 2012, Mr. Scott R. Silverman entered into the Employment and Non-Compete Agreement, or the 2012 Employment Agreement, with VAC. The 2012 Employment Agreement terminated five years from the effective date. The 2012 Employment Agreement provided for an annual base salary in 2012 of $300,000 with minimum annual increases of 10% of the base salary and an annual bonus equal to the annual base salary then in effect. Mr. Silverman was also entitled to an annual non-allocable expense payment of $45,000 each year and other fringe benefits. If Mr. Silverman’s employment was terminated prior to the expiration of the term of the 2012 Employment Agreement, Mr. Silverman was to receive (i) all earned but unpaid salary and bonuses; (ii) the greater of the base salary from the date of termination through December 31, 2016 or two times the base salary; and (iii) the average bonus paid by us to Mr. Silverman for the last three full calendar years (or such lesser time period if the 2012 Employment Agreement was terminated less than three years from the effective date), plus certain fringe benefits required to be paid by us. In addition, the 2012 Employment Agreement contained a change of control provision that provided for the payment of five times the then current base salary and five times the average bonus paid to Mr. Silverman for the three full calendar years immediately prior to the change of control, as defined in the 2012 Employment Agreement. Any outstanding stock options and restricted stock held by Mr. Silverman as of the date of his termination or a change of control became vested and exercisable as of such date, and remained exercisable during the remaining life of the option. Mr. Silverman’s 2012 Employment Agreement was terminated effective July 8, 2013 at which time Mr. Silverman entered into a new employment agreement effective with the closing of Exchange Agreement, which was amended and restated on November 14, 2013, or the Silverman Employment Agreement, appointing Mr. Silverman as our chairman and chief executive officer, effective as of July 8, 2013 until December 31, 2016. Under the Silverman Employment Agreement, Mr. Silverman will receive a base salary of $330,000, which base salary will be reviewed annually and is subject to a minimum increase of 5% per calendar year during each year of the term. Accordingly, Mr. Silverman’s base salary was increased to $346,500 beginning January 1, 2014. During the term, Mr. Silverman will be eligible to receive an annual bonus, based on performance metrics and goals as determined annually by the Board of Directors, with the amount of such bonus to be determined based upon the annual objectives determined by the compensation committee of the Board of Directors, but in no event to be less than 100% of earned base salary for the applicable year. The bonus shall be paid in cash or, if Mr. Silverman and the Company agree at the time, using shares of the Company’s common stock, at a valuation equal to fair market value.  On January 30, 2014, the compensation committee of the board of directors authorized a discretionary bonus in the amount of $100,000 to be paid to Mr. Silverman. This discretionary bonus is in addition to Mr. Silverman’s minimum bonus for 2013 under the terms of his employment agreement. The discretionary bonus shall be accrued. It will be paid in cash after the compensation committee determines we have adequate working capital to make such payments, or, if we are permitted to do so without triggering a reset provision on any outstanding warrants and the applicable employee so elects, in shares of our common stock, in which case the amount of the bonus would be increased by 25%.           

 

Under the Silverman Employment Agreement, VC agreed to satisfy certain currently unpaid contractual obligations under Mr. Silverman’s December 2012 Employment Agreement aggregating $912,116, or the Silverman Contractual Obligations, if VC receives gross proceeds of an aggregate of $3,000,000 in cash in any capital investment or capital raise or series of capital investments or capital raises. The Silverman Contractual Obligations shall be payable as follows: (i) one-third (1/3rd) in cash and (ii) two-thirds (2/3rds) in shares of restricted VC common stock, based on the closing price of a share of VC’s common stock on the closing date of the investment.

 

If Mr. Silverman’s employment is terminated prior to the expiration of the term, certain payments become due. In the event Mr. Silverman is terminated with cause or he terminates for any reason other than good reason, Mr. Silverman is entitled to receive (i) earned or accrued but unpaid, base salary, through the date of termination, (ii) any bonus earned or accrued and vested, but unpaid, (iii) the economic value of the employee’s accrued, but unused, vacation time, and (iv) any unreimbursed business expenses incurred by the employee (collectively, the “Accrued Obligations”). In the event Mr. Silverman is terminated without cause or he terminates for good reason, or upon his death, Mr. Silverman is entitled to receive the Accrued Obligations and a termination payment equal to his base salary from the date of termination through December 31, 2016, (or two years whichever is longer) plus bonus for such period, with such bonus being determined based upon the time remaining between the date of termination and December 31, 2016 (or two years, whichever is longer) and with the rate of bonus to be based upon the average annual bonus paid by the Company to Mr. Silverman over the last three (3) full calendar years (or if the Agreement is terminated before Mr. Silverman has been employed by the Company for three (3) full calendar years, for purposes of calculating the average Annual Bonus, the Company will use 100% of Mr. Silverman’s base salary as the annual bonus) plus certain benefits as set forth in the Silverman Employment Agreement.

  

In addition, the Silverman Employment Agreement contains a change of control provision that provides for the payment of 299% of Mr. Silverman’s base salary plus 299% of the average annual bonus paid over the last three (3) full calendar years (or 60% of base salary if the Silverman Employment Agreement is terminated before Mr. Silverman has been employed for three full years). Any outstanding stock options and unvested restricted stock held by Mr. Silverman as of the date of termination (other than for cause or by Mr. Silverman without good reason) or a change of control shall become vested and exercisable as of such date, and remain exercisable during the life of the option. In the event Mr. Silverman is terminated for cause or terminates without good reason, any unvested options and restricted stock awards shall terminate and all vested options shall remain exercisable for a period of ninety (90) days. The Silverman Employment Agreement also contains non-compete and confidentiality provisions which are effective from the date of employment through eighteen months from the date the Silverman Employment Agreement is terminated.

 

 
32

 

 

Randolph Geissler Employment Agreements

  

On January 2, 2013, VAC entered into an employment agreement with our president, Mr. Randolph Geissler with an effective date of September 1, 2012, or the Geissler 2012 Agreement. The Geissler 2012 Agreement called for an annual base salary of $200,000 and discretionary annual and incentive bonuses. The term of the Geissler 2012 Agreement was two years from the effective date and could be extended by mutual consent of the parties. The Geissler 2012 Agreement also provided for the issuance on January 2, 2013 of 4.5 million restricted shares of our common stock, which vested the earlier of January 2, 2015 or a change of control of VAC. Payments of compensation under the Geissler 2012 Agreement commenced within 30 days of VAC receiving a capital investment from any third party in excess of $5.0 million, the first payment of which was to be retroactive to September 1, 2012 and included any and all sums due and owing to Mr. Geissler at that time. Upon termination of the Geissler 2012 Agreement by Mr. Geissler or us, Mr. Geissler was entitled to receive any earned but unpaid salary and bonuses and all outstanding stock options and restricted stock was to be forfeited. Upon termination of the agreement by us without cause, Mr. Geissler was also entitled to receive certain fringe benefits through December 2014. Upon a change of control as defined in the agreement, Mr. Geissler was entitled to receive any earned but unpaid salary and bonuses and any outstanding stock options and restricted stock was to vest and the stock options were to remain exercisable through the life of the option. The Geissler 2012 Agreement was terminated effective July 8, 2013 at which time Mr. Geissler entered into a new employment agreement effective with the closing of Exchange Agreement, which was amended and restated on November 14, 2013, or the Geissler Employment Agreement appointing Mr. Geissler as president of VC, effective as of July 8, 2013. The Geissler Employment Agreement is for a term of two (2) years and is renewable for additional one (1) year periods upon mutual agreement. Under the Geissler Employment Agreement, Mr. Geissler will receive a base salary of $200,000, which base salary will be reviewed annually and is subject to a minimum increase of 5% per annum each calendar year. Accordingly, Mr. Geissler’s salary was increased to $210,000 beginning January 1, 2014. Mr. Geissler is eligible to receive an annual bonus, based on performance metrics and goals as determined annually by the Board of Directors, with the amount of such bonus to be determined based upon the annual objectives determined by the compensation committee of the Board of Directors, but in no event to be less than 100% of earned base salary for the applicable year. The bonus shall be paid in cash or, if Mr. Geissler and the Company agree at the time, using shares of the Company’s common stock, at a valuation equal to fair market value. On January 30, 2014, the compensation committee of the board of directors authorized a discretionary bonus in the amount of $75,000 to be paid to Mr. Geissler. This discretionary bonus is in addition to Mr. Geissler’s minimum bonus for 2013 under the terms of his employment agreement. The discretionary bonus shall be accrued. It will be paid in cash after the compensation committee determines we have adequate working capital to make such payments, or, if we are permitted to do so without triggering a reset provision on any outstanding warrants and the applicable employee so elects, in shares of our common stock, in which case the amount of the bonus would be increased by 25%.

 

Mr. Geissler is also entitled to the following: (i) the Company shall, at its option, either lease for Mr. Geissler an automobile, or reimburse Mr. Geissler for the lease or financing payments incurred by Mr. Geissler’s on his automobile, the amount of such reimbursement to be reasonably comparable to 75% of the current cost on the automobile then being provided to the Company’s CEO. The Company shall reimburse car-related expenses; (ii) the Company shall, at its option, either provide to Mr. Geissler disability insurance that provides standard disability coverage and terms, in an amount of at least equal to $15,000 per month until age 65, or reimburse Mr. Geissler for the premium payments incurred by him for disability insurance coverage for himself, the amount of such reimbursement to be reasonably comparable to the current cost of his disability insurance; (iii) the Company shall provide comprehensive health insurance as it provides to other executives and employees; (iv) reimbursement for expenses related to business attire in an amount not to exceed $950 per month; and (v) if the Company elects to secure a key man life insurance policy on the life of Mr. Geissler, it will provide a split-dollar policy.   

 

Under the Geissler Employment Agreement, the Company agreed to satisfy certain currently unpaid contractual obligations under Mr. Geissler’s January 2, 2013 employment agreement of $166,666, or the Geissler Contractual Obligations, if VC receives gross proceeds of an aggregate of $3,000,000 in cash in any capital investment or capital raise or series of capital investments or capital raises. The Geissler Contractual Obligations shall be payable as follows: (i) one-third (1/3rd) in cash and (ii) two-thirds (2/3rds) in shares of restricted VC common stock, based on the closing price of a share of VC’s common stock on the closing date of the investment.

 

If Mr. Geissler’s employment is terminated for cause or he terminates for any reason other than good reason, Mr. Geissler is entitled to receive the Accrued Obligations. In the event Mr. Geissler is terminated without cause or he terminates for good reason, or termination upon his death, Mr. Geissler is entitled to receive the Accrued Obligations and a termination payment equal to one times his base salary plus the previous year’s bonus, but no less than one times his base salary. In the event that Mr. Geissler is terminated as a result of a change in control, Mr. Geissler is entitled to receive the Accrued Obligations and a termination payment equal to two times his base salary, plus the previous year’s bonus, but no less than two times his base salary. Any termination payment shall be payable to Mr. Geissler in cash, or if Mr. Geissler agrees, in shares of the Company’s common stock valued at market value. Any outstanding stock options and unvested restricted stock held by Mr. Geissler as of the date of termination (other than for cause or by Mr. Geissler without good reason) or a change of control shall become vested and exercisable as of such date, and remain exercisable during the life of the option. In the event Mr. Geissler is terminated for cause or terminates without good reason, any unvested options and restricted stock awards shall terminate and all vested options shall remain exercisable for a period of ninety (90) days. The Geissler Employment Agreement also contains non-compete and confidentiality provisions which are effective from the date of employment through one year from the date the Geissler Employment Agreement is terminated.

  

 
33

 

 

Michael E. Krawitz Employment Agreement   

 

Effective January 31, 2014, we entered into an employment agreement with Michael Krawitz to serve as our Chief Legal and Financial Officer, or the Krawitz Employment Agreement. The Krawitz Employment Agreement is for an initial term of two (2) years and is renewable for additional one (1) year terms upon mutual agreement of the parties. Under the Krawitz Employment Agreement, Mr. Krawitz will receive a base salary of $210,000, which base salary will be reviewed annually by the compensation committee and is subject to a minimum increase of 5% per annum, with the first increase to be effective on January 1, 2015. Mr. Krawitz is also entitled to (i) disability insurance or reimbursement of disability insurance in an amount at least equal to $15,000 per month until age 65; (ii) health insurance; (iii) an automobile or reimbursement of lease or financing payments incurred, the amount of such reimbursement to be reasonably comparable to 75% of the current cost of the automobile being provided to our Chief Executive Officer; and (iv) life insurance. During the term of the Krawitz Employment Agreement, Mr. Krawitz is eligible to receive an annual bonus based on performance metrics and goals as determined annually by the Company’s Board of Directors, with the amount of such bonus to be determined based upon annual objectives determined by the compensation committee of the Board of Directors, but in no event will be less than 100% of Mr. Krawitz’s earned base salary for the applicable year.


If Mr. Krawitz’s employment is terminated prior to the expiration of the term, certain payments become due. In the event Mr. Krawitz is terminated with cause or he terminates for any reason other than good reason, Mr. Krawitz is entitled to receive (i) earned or accrued but unpaid, base salary, through the date of termination, (ii) any bonus earned or accrued and vested, but unpaid, (iii) the economic value of the employee’s accrued, but unused, vacation time, and (iv) any unreimbursed business expenses incurred by the employee, collectively, the Krawitz Accrued Obligations. In the event Mr. Krawitz is terminated without cause or he terminates for good reason, Mr. Krawitz is entitled to receive the Krawitz Accrued Obligations and a termination payment equal to his base salary plus the previous year’s bonus (but no less than one times his base salary). In the event that Mr. Krawitz is terminated as a result of a change in control, Mr. Krawitz is entitled to receive any Krawitz Accrued Obligations and a termination payment equal to two times his base salary, plus the previous year’s bonus, but no less than two times his base salary. Any outstanding stock options and unvested restricted stock held by Mr. Krawitz as of the date of termination (other than for cause or by Mr. Krawitz without good reason) or a change of control shall become vested and exercisable as of such date, and remain exercisable during the life of the option. In the event Mr. Krawitz is terminated for cause or terminates without good reason, any unvested options and restricted stock awards shall terminate and all vested options shall remain exercisable for a period of ninety (90) days. The Krawitz Employment Agreement also contains noncompete provisions which are effective from the date of employment through one year from the date the Krawitz Employment Agreement is terminated.

 

Executive Employment Arrangements with 2012 Named Executive Officers

 

We had not entered into any employment agreements, termination or change in control arrangements with Mr. Penni. By letter agreement, we are required to give Ms. Breece a ninety-day termination payment if we terminate her employment with us. On January 30, 2014, the compensation committee of the board of directors authorized a 2013 discretionary bonus in the amount of $50,000 to be paid to Ms. Breece. The discretionary bonus shall be accrued. It will be paid in cash after the compensation committee determines we have adequate working capital to make such payments, or, if we are permitted to do so without triggering a reset provision on any outstanding warrants and the applicable employee so elects, in shares of our common stock, in which case the amount of the bonus would be increased by 25%.   

 

Executive Employment Arrangements with Former Named Executive Officers

 

A discussion of an employment agreement with our former named executive officer, Mr. Haller, follows: 

  

L. Michael Haller

 

On August 23, 2012, the board of directors selected and approved L. Michael Haller to be our CEO, president and a director. In connection with Mr. Haller’s appointment, we entered the Original Employment Agreement, which provided that Mr. Haller would receive a base salary of $150,000. The Original Employment Agreement also provided that, if we terminated Mr. Haller’s employment without cause or Mr. Haller terminated his employment for good reason, Mr. Haller would receive a severance payment equal to the sum of one times his base salary. In addition, on August 27, 2012, Mr. Haller was granted stock options to purchase 333,333 shares of our common stock, with an exercise price of $1.50 per share of which 66,666 vested on August 27, 2012 and were granted as a signing bonus. The remaining 266,667 options were performance-based and would vest upon achievement of specified targets. The stock options, which were granted outside of the company’s stock option plans as an inducement to employment, had an expiration date of August 26, 2022.

 

Unvested stock options held by Mr. Haller would become fully vested and exercisable on a pro-rata basis to the extent that Mr. Haller had achieved some or all of the applicable incentive targets as outlined for each unvested Tranche upon any termination of employment by us without cause, or by Mr. Haller for good reason or due to Mr. Haller’s disability or death, which occurred at least six months after the effective date of the Original Employment Agreement and would remain exercisable for a period of 60 (sixty) days following any such termination (subject to earlier expiration of the original option term). Upon any termination of employment by us for cause, by Mr. Haller for any reason other than good reason, or Mr. Haller terminated his employment for any reason, all unvested options terminated immediately.

  

 
34

 

 

In the event of a change in control, as defined in the agreement, all unvested stock options would immediately accelerate and become vested. The Original Employment Agreement also contained non-compete and confidentiality provisions, and also included a commitment to nominate and support Mr. Haller and one additional person named by Mr. Haller for election to the board of directors, subject to stockholder election.

 

Effective May 3, 2013, we entered into the Amendment to Employment Agreement with Mr. Haller, which amended and terminated the Original Employment Agreement. Under the terms of the Amended Employment Agreement: (i) Mr. Haller resigned as the Company’s Chief Executive Officer, President and director upon the closing of the sale of the Company’s mobile game application business on May 3, 2013, (ii) the Company paid Mr. Haller all accrued but unpaid obligations due under the Original Employment Agreement plus a cash lump sum of $10,000 in lieu of any severance or similar payments that might have been required under the Original Employment Agreement, (iii) the Company waived the non-compete and non-solicitation provisions contained in the Original Employment Agreement, and (iv) both parties mutually agreed to release each other from any other claims that they may have against each other. The Amended Employment Agreement further stated that Mr. Haller’s stock option to purchase 66,666 shares of the Company’s common stock at $1.50 per share, which vested on August 27, 2012, may be exercised for a period of sixty (60) days following the effective date of the Amended Employment Agreement. Mr. Haller did not exercise these options and, accordingly, they expired on July 2, 2013. In addition, Mr. Haller’s stock options to purchase up to 266,667 shares, which were not vested as of the date of the Amended Employment Agreement, were forfeited as of such date.

 

Outstanding Equity Awards as of December 31, 2013

 

The following table provides information as of December 31, 2013 regarding unexercised stock options and restricted stock awards granted to each of our named executive officers by us. 

 

  

  

Option Awards

  

Stock Awards

  

Name

  

Number of Securities Underlying Unexercised Options Exercisable

  

  

Number of Securities Underlying Unexercised Options Unexercisable

  

  

Equity Incentive Plan Awards: Number of Securities Underlying Unearned Options

  

  

Option

Exercise

Price

  

Option

Expiration

Date

  

Number of Shares or Units of Stock That Have Not Vested

  

  

Market Value of Shares of Units of Stock That Have Not Vested

  

  

Equity Incentive Plan Awards: Number of Unearned Units or Other Rights That Have Not Vested

  

  

Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Scott R. Silverman

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

729

  

  

  

  

  

  

  

  

  

  

$

972.00

  

01/25/2014

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

2,917

  

  

  

  

  

  

  

  

  

  

$

588.00

  

02/18/2014

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

1,167

  

  

  

  

  

  

  

  

  

  

$

871.20

  

02/25/2015

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

817

  

  

  

  

  

  

  

  

  

  

$

962.40

  

03/07/2015

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

2,333

  

  

  

  

  

  

  

  

  

  

$

559.20

  

06/14/2016

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

190,833

  

  

  

  

  

  

  

  

  

  

$

0.05

  

03/16/2020

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

190,833

  

  

  

  

  

  

  

  

  

  

$

0.05

  

12/09/2021

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

381,665

(1)

  

  

  

  

  

$

1.57

  

02/07/2018

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Randolph Geissler

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

127,222

  

  

  

  

  

  

  

  

  

  

$

0.05

  

03/16/2020

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

381,665

(1)

  

  

  

  

  

$

1.57

  

02/07/2018

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

858,747

(2)

  

$

1,966,531

  

  

  

  

  

  

  

  

  

Lorraine M. Breece

  

  

 

583

  

  

  

  

  

  

  

  

  

  

 

$

 

266.40

  

 

08/15/2017

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

15

  

  

  

  

  

  

  

  

  

  

$

360.00

  

06/20/2018

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

15

  

  

  

  

  

  

  

  

  

  

$

768.00

  

06/20/2018

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

21

  

  

  

  

  

  

  

  

  

  

$

360.00

  

06/20/2018

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

278

  

  

  

  

  

  

  

  

  

  

$

15.60

  

12/12/2018

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

1,667

  

  

  

  

  

  

  

  

  

  

$

2.10

  

09/09/2022

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

Daniel E. Penni

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

417

  

  

  

  

  

  

  

  

$

328.80

  

07/02/2015

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

115

  

  

  

  

  

  

  

  

$

360.00

  

06/20/2018

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

42

  

  

  

  

  

  

  

  

$

768.00

  

06/20/2018

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

833

  

  

  

  

  

  

  

  

$

15.60

  

12/12/2018

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

417

  

  

  

  

  

  

  

  

$

32.40

  

10/01/2019

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

3,333

  

  

  

  

  

  

  

  

$

2.10

  

09/09/2022

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

L. Michael Haller(1)

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(3)

  

  

  

  

$

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

  

(1)

Stock options vested on January 1, 2014

  

(2)

Restricted stock vests on January 1, 2015

 

(3)

Mr. Haller resigned as president, chief executive officer and director of the Company effective May 3, 2013.  

 

 
35

 

 

2013 Option Exercises and Stock Vested 

 

None of our named executive officers exercised options during the year ended December 31, 2013. On January 25, 2013, 42 shares of restricted stock vested for Mr. Penni. 

 

Pension Benefits 

 

None of our named executive officers are covered by a pension plan or other similar benefit plan that provides for payments or other benefits at, following, or in connection with retirement.

 

Nonqualified Deferred Compensation 

 

None of our named executive officers are covered by a defined contribution or other plan that provides for the deferral of compensation on a basis that is not tax-qualified.  

 

 

2013 Director Compensation 

 

Name

 

Fees Earned or Paid in Cash

   

Stock Awards

   

Option Awards

   

Non-Equity Incentive Plan Compensation

   

Nonqualified Deferred Compensation Earnings

   

All Other Compensation

   

Total

 

Scott R. Silverman(1)

  $     $     $     $    

S

    $     $  

Barry Edelstein(2)

    6,500                                     6,500  

Michael Krawitz(3)

    6,500                                     6,500  

Shawn Wooden(4)

    6,500                                     6,500  

Daniel E. Penni(5)

    45,935                                     45,935  

Dennis G. Rawan(6)

    23,400                                     23,400  

Joseph J. Grillo(7)

                                           

L. Michael Haller(1)

                                         

 

  

(1)

Mr. Silverman and Mr. Haller did not receive any compensation as directors. See section “Executive Compensation” for details regarding their compensation as executive officers for 2013. Mr. Haller resigned from the company effective May 3, 2013.

  

(2)

As of December 31, 2013, Mr. Edelstein held options to purchase 40,500 shares of our common stock. Mr. Edelstein was appointed a director on July 8, 2013. 

  

(3)

As of December 31, 2013, Mr. Krawitz held options to purchase 76,334 shares of our common stock. Mr. Krawitz was appointed a director on July 8, 2013.  Mr. Krawitz was appointed our chief legal and financial officer effective January 31, 2014.

  

(4)

As of December 31, 2013, Mr. Wooden held options to purchase 38,167 shares of our common stock. Mr. Wooden was appointed a director on July 8, 2013.

  

(5)

As of December 31, 2013, Mr. Penni held options to purchase 5,156 shares of our common stock. Mr. Penni served as the chairman of our board of directors from January 1 to July 7, 2013.

  

(6)

As of December 31, 2013, Mr. Rawan held options to purchase 4,583 shares of our common stock. Mr. Rawan resigned as a director effective July 7, 2013. 

  

(7)

As of December 31, 2013, Mr. Grillo held options to purchase 13,604 shares of our common stock.  Mr. Grillo resigned as a director effective July 7, 2013.  

  

 
36

 

 

Prior to the Share Exchange on July 8, 2013, the compensation committee of our board of directors determined that the annual compensation for outside directors for 2013 was as follows: (i) $7,200 per quarter for board service, (ii) an additional $3,600 and $1,800 per quarter for service as the audit and governance committee chair and the compensation committee chair, respectively, (iii) an additional $900 per quarter for service as a member of the audit and governance committee and the compensation committee, and (iv) $17,550 per quarter for service as the chairman of our board of directors. Subsequent to the Share Exchange, the compensation committee of our board of directors revised the annual compensation for directors as follows: No fees were paid for the period July 8 to September 30, 2013. Beginning October 1, 2013, the fees are as follows: (i) $5,000 per quarter for board service; and (ii) an additional $1,500 per quarter for service as chairman of a board committee. Reasonable out of pocket travel expenses are reimbursed when incurred. Directors who are not also executive officers are not eligible to participate in any of our other benefit plans. Mr. Penni who served as our interim chief executive and president officer from May 3, 2013 to July 7, 2013 did not participate in any of our other benefit plans, nor was he being compensated for serving as our president and interim chief executive officer, but he was being compensated for his services as chairman of our board of directors.  

 

None of our directors exercised options during the year ended December 31, 2013. On January 25, 2013, 42 shares of restricted stock vested for Messrs. Penni and Rawan each.   

 

Stock Option and Other Compensation Plans 

 

Stock Options and Other Awards Granted under the 1999 Flexible Stock Plan, the 2003 Flexible Stock Plan and the Amended and Restated Digital Angel Corporation Transition Stock Option Plan. 

 

The 1999 Flexible Stock Plan, the 2003 Flexible Stock Plan and the Amended and Restated Digital Angel Corporation Transition Stock Option Plan, or the Digital Angel Plan, are long-term plans designed to link rewards with stockholder value over time. Stock options are granted to aid in the retention of employees and to align the interests of employees with stockholders. The value of the stock options to an employee increases as the price of our stock increases above the fair market value on the grant date, and the employee must remain in our employ for the period required for the stock option to be exercisable, thus providing an incentive to remain in our employ.

 

The 2003 Flexible Stock Plan and the Amended and Restated Digital Angel Corporation Transition Stock Option Plan are also designed to encourage ownership of our common stock by employees, directors and other individuals, and to promote and further our best interests by granting options and other stock awards. Under these plans, we may grant awards of our common stock in lieu of payments of cash compensation pursuant to the mutual agreement of the participant and us. During 2013, no options were granted to directors, employees and consultants, under these plans.

 

Stock Options Granted under the 1999 Employees Stock Purchase Plan. 

 

The 1999 Employees Stock Purchase Plan, which is intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code, or Code, provides eligible employees with an opportunity to accumulate, through payroll deductions, funds to be used toward the purchase of our stock pursuant to options granted under the plan. Options granted in connection with an offering under the plan permit the option holder to purchase our stock at a price per share equal to 85% of the fair market value of the stock on (i) the date on which the option was granted (i.e., the first business day of the offering) and (ii) the date on which the option was exercised (i.e., the last business day of the offering), whichever is less. Section 423 of the Code also provides certain favorable tax consequences to the option holder, provided that the stock acquired under the plan is held for a specified minimum period of time. Under FAS 123R, which became effective for us on January 1, 2006, options granted under the plan may be compensatory. During 2013, we did not grant any options under the plan. 

 

Digital Angel Corporation 2013 Stock Incentive Plan 

 

On July 12, 2013, pursuant to the Exchange Agreement, a majority of our voting stockholders adopted resolutions by written consent approving the DAC 2013 Stock Plan under which employees, including officers and directors, and consultants may receive awards. The aggregate number of shares of the Company’s common stock that may be subject to awards under the DAC 2013 Plan, subject to adjustment upon a change in capitalization, is 5.0 million shares. Such shares of common stock may be authorized, but unissued, or reacquired shares of common stock. Shares of common stock that were subject to DAC 2013 Plan awards that expire or become unexercisable without having been exercised in full shall become available for future awards under the DAC 2013 Plan. Awards under the DAC 2013 Plan include incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock performance units, performance shares, cash awards and other stock based awards. The purposes of the DAC 2013 Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to employees and consultants, to promote the success of the Company’s business and to link participants’ directly to stockholder interests through increased stock ownership. The DAC 2013 Plan became effective on October 18, 2013, upon effectiveness of the Reverse Stock Split. On October 18, 2013, the outstanding stock options under the three VAC’s stock plans were converted into options to acquire 2.6 million shares of VC’s common stock under the DAC 2013 Plan and VAC’s three former stock plans were terminated. No additional options were granted under the DAC 2013 Stock Plan during 2013.

  

 
37

 

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The following table sets forth certain information known to us regarding beneficial ownership of shares of our common stock as of April 10, 2014 by:

 

(i)

each person known to us to beneficially own more than 5% of our common stock,

 

(ii)

each of the named executive officers (as disclosed in the summary compensation table),

 

(iii)

each of our directors, and

 

(iv)

all of the current executive officers and directors as a group.

 

Beneficial ownership is determined in accordance with the rules and regulations of the SEC and includes voting and investment power with respect to the securities. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to options or warrants held by that person that are currently exercisable or exercisable within 60 days of April 10, 2014 are deemed outstanding. Such shares, however, are not deemed outstanding for purposes of computing the percentage ownership of any other person. To our knowledge, except as indicated in the footnotes to this table and subject to community property laws where applicable, the persons named in the table have sole voting and investment power with respect to all shares of our common stock shown opposite such person’s name. The percentage of beneficial ownership is based on 9,936,464 shares of our common stock outstanding as of April 10, 2014. Unless otherwise noted below, the address of the persons and entities listed in the table is c/o VeriTeQ Corporation, 220 Congress Park Drive, Suite 200, Delray Beach, Florida 33445.    

 

Name and Address of Beneficial Owner

 

Number of

Shares

Beneficially

Owned (#)

   

Percent of

Outstanding

Shares (%)

 

Five Percent Stockholders:

               

Scott R. Silverman (1)

    6,448,511       60

%

SNC Holdings Corp. (2)

    2,149,504       18

%

Randolph K. Geissler (1)

    1,505,883       14

%

Named Executive Officers and Directors:

               

Scott R. Silverman (1)

    6,448,511       60

%

Randolph K. Geissler (1)

    1,505,883       14

%

Barry M. Edelstein (1)

    169,713       2

%

Michael E. Krawitz (1)

    234,987       2

%

Daniel E. Penni (1)

    39,975        *  

Shawn A. Wooden (1)

    38,167        *  

Executive Officers and Directors as a group (6 persons)

    8,437,236       79

%

 

* Represents less than 1%

 

(1)

This table includes shares of our common stock issuable upon the exercise of stock options or warrants that are currently exercisable or exercisable within sixty days of April 10, 2014, in accordance with Rule 13d-3(d) under the Exchange Act. The following directors and executive officers hold the number of exercisable warrants and/or options to purchase the number of shares set forth following their respective names: Scott Silverman — 767,648 options, Randolph Geissler — 87,465 warrants and 508,887 options, Barry Edelstein — 28,624 warrants and 40,500 options, Michael Krawitz — 76,334 options, Daniel Penni — 5,156 options, Shawn Wooden — 38,167 options; and all current directors and officers as a group — 1,552,780 (116,089 warrants and 1,436,692 options). Each of the officers and directors has dispositive power over the shares listed above.

(2)

Represents common stock issuable upon conversion of a promissory note.  

 

Securities Authorized for Issuance Under Equity Compensation Plans 

 

Effective October 18, 2013, outstanding stock options under the three VAC’s stock plans were converted into options to acquire 2.6 million shares of VC’s common stock under the DAC 2013 Stock Plan and VAC’s three former stock plans were terminated. Previously, VAC had issued approximately 1.0 million stock options and 0.9 million shares of restricted under its former stock plans during 2013. No additional options were granted under the DAC 2013 Stock Plan during 2013. Shares of our common stock that were authorized for issuance under our equity compensation plans is presented on page 17 of this Annual Report.

  

 
38

 

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

Since January 1, 2012, there has not been, and there is not currently proposed any transaction or series of similar transactions in which the amount involved exceeded or will exceed the lesser of $120,000 or one percent of the average of our total assets at year end for the last two completed fiscal years and in which any related person, including any director, executive officer, holder of more than 5% of our capital stock during such period, or entities affiliated with them, had a material interest, other than as described in the transactions set forth below.

 

Related Party Transactions

 

Shared Services Agreement with PSID

 

We entered into a shared services agreement, or the SSA, with PSID on January 11, 2012, pursuant to which PSID agreed to provide certain services, including administrative, rent, accounting, business development and marketing, to us in exchange for $30,000 per month. The SSA has also included working capital advances from time to time. The term of the SSA commenced on January 23, 2012. The first payment for such services was not payable until we received gross proceeds of a financing of at least $500,000. On June 25, 2012, the level of resources provided under the SSA was reduced and the agreement was amended, pursuant to which all amounts owed to PSID under the SSA as of May 31, 2012 were converted into approximately 2.3 million shares of VAC’s common stock valued at $0.2 million. In addition, effective June 1, 2012, the monthly charge for the shared services under the SSA was reduced from $30,000 to $12,000.

 

On August 28, 2012, the SSA was further amended to align with the level of services being provided, pursuant to which, effective September 1, 2012, the monthly charge for the shared services under the SSA was reduced from $12,000 to $5,000. On April 22, 2013, we and PSID entered into a non-binding letter agreement in which PSID agreed to provide up to an additional $60,000 of support during April and May 2013.

 

On July 8, 2013, we entered into a letter agreement with PSID, or the July Letter Agreement, to amend certain terms of several agreements between PSID and us. The July Letter Agreement amended certain terms of the SSA entered into between PSID and us on January 11, 2012, as amended, the APA entered into on August 28, 2012, as amended, and the PSID Note dated January 11, 2012, in favor of PSID in the principal amount of $200,000. VC assumed the obligations under the PSID Note in connection with the Share Exchange as of the date of the July Letter Agreement. On November 8, 2013, we entered into a Letter Agreement, or the November Letter Agreement, with PSID which further amended the terms of the several agreements between PSID and us.

 

The July Letter Agreement, as modified by the November Letter Agreement, provides for:

 

 

(i)

At closing of a capital raise with cumulative gross proceeds of at least $3.0 million, $100,000 of the balance owed under the SSA shall be due within two business day after funding. Within thirty and sixty days after the initial $100,000 payment, we shall pay $50,000 each (total of an additional $100,000) and the balance of the outstanding amount shall be paid by 90 days after the initial $100,000 is paid. In the event any of the balance is unpaid at March 31, 2014, interest on the outstanding balance accrues at 10% per annum. If the initial $100,000 payment is made by March 31, 2014, no interest shall accrue so long as we comply with the payment schedule required.

 

(ii)

The elimination of minimum royalties payable to PSID under the APA in their entirety. In the event that royalty payments under the APA based on our attainment of certain sales levels are not at least $800,000 for the calendar year 2014, then we shall grant PSID Corporation a non-exclusive, perpetual, non-transferrable, world-wide, fully paid license to said patents.

 

(iii)

An amendment to the PSID Note, with a principal and interest balance of $228,000 on September 30, 2013, to provide that no interest will accrue on the PSID Note from July 8, 2013 to September 30, 2013 and to include a conversion feature under which the PSID Note may be repaid, at our option, in VC’s common stock in lieu of cash.

  

(iv)

VC will grant PSID a warrant to purchase 300,000 shares of common stock at an exercise price of $2.84. The warrants will be exercisable for a period of five years. The terms and form of warrant will be the same as those granted to certain investors, which are more fully discussed in Note 13.

 

In addition, pursuant to the terms of the July Letter Agreement, we issued approximately 16,666 shares of common stock on October 10, 2013 in connection with the repayment of the PSID Note, and we have agreed to issue an additional 135,793 shares of common stock as soon as possible thereafter. These shares issued and to be issued by us to PSID will be issued in private placement in reliance upon the exemption from the registration requirements set forth in the Act provided for in Section 4(2) of the Securities Act, and Rule 506 of Regulation D promulgated by the SEC thereunder. In connection with a financing, which occurred on November 13, 2013, the PSID Note was assigned by PSID to certain investors. As of April 10, 2014, we have issued 46,847 shares of the additional 135,793 shares of our common stock due as partial payment of the PSID Note to one of the investors.

  

 
39

 

 

As of December 31, 2013 and 2012, we owed PSID $0.2 million and $0.1 million, respectively, for shared services and working capital advances.

 

Investment from VeriTeQ Corporation’s Director

 

Following VC’s approval of the Exchange Agreement in June 2013, VAC approached VC for a small, short-term bridge loan or equity investment. In light of the many conditions to closing, VC’s board decided not to make the loan or investment. VC’s then interim chief executive officer and president and then chairman of VC’s board, Daniel E. Penni, agreed to make a $25,000 equity investment in VAC. As a result of such investment in June 2013, Mr. Penni owned shares of VAC’s common stock, which have been exchanged for 19,084 shares of VC’s common stock. Mr. Penni continues to serve as a member of VC’s board.

 

Notes Payable

 

During 2012, 2013 and through April 10, 2014, VC and VAC issued notes payable to certain directors, officers and a relative of a director as follows:  

 

On October 12, 2012, VAC entered into a promissory note with its president, Randolph Geissler, and his business partner in the amount of $125,000. The note bore interest at 10% per annum and was convertible into VAC’s common stock. In connection with the note, Mr. Geissler and his partner received warrants to acquire shares of VAC’s common stock. The note was fully converted on June 1, 2013. As an inducement to conversion, additional warrants to acquire VAC’s common stock were granted. All of the warrants issued in connection with the note have been converted into warrants to acquire 79,514 shares of VC’s common stock at an exercise price of $1.57 per share.

 

On December 31, 2012, VAC entered into a promissory note with its director, Barry Edelstein, in the amount of $50,000. The note bore interest at 10% per annum and was convertible into VAC’s common stock. In connection with the note, Mr. Edelstein received warrants to acquire shares of VAC’s common stock. The note was fully converted on June 1, 2013. As an inducement to conversion, additional warrants to acquire VAC’s common stock were granted. All of the warrants issued in connection with the note have been converted into warrants to acquire 28,624 shares of VC’s common stock at an exercise price of $1.57 per share.

 

On December 31, 2012, VAC entered into a promissory note with a relative of its director, Barry Edelstein, in the amount of $100,000. The note bore interest at 10% per annum and was convertible into VAC’s common stock. In connection with the note, Mr. Edelstein’s relative received warrants to acquire shares of VAC’s common stock. The note was fully converted on June 1, 2013. As an inducement to the conversion, additional warrants to acquired VAC’s common stock were granted. All of the warrants issued in connection with the note have been converted into warrants to acquire 57,250 shares of VC’s common stock at an exercise price of $1.57 per share.

 

On April 10, 2013, VAC entered into a promissory note with its president, Randolph Geissler and his business partner in the amount of $50,000. The note bore interest at 10% per annum was due on demand and was repaid on November 15, 2013. In connection with the note, Mr. Geissler and his partner received warrants to acquire shares of VAC’s common stock. The warrants were converted into warrants to acquire 95,416 shares of VC’s common stock at an exercise price of $1.31 per share.

 

On October 11, 2013, VAC entered into a promissory note with its CEO, Scott Silverman, in the principal amount of $80,000. The note bears interest at 5% per annum and is due on demand. On November 15, 2013, we made a partial repayment of $50,000 and on February 5, 2014 we made a partial payment of $25,000 leaving a current balance of $5,000 outstanding.  

 

On October 29, 2013, VC entered into a promissory note with its CEO, Scott Silverman, in the principal amount of $30,000. The note bears interest at 5% per annum and is due on demand.

 

On January 8, 2014, VC entered into a promissory note with its director, Michael Krawitz, in the principal amount of $60,000. The note bears interest at 5% per annum and is due on demand.

 

On January 15, 2014, VC entered into a promissory note with its president, Randolph Geissler, in the principal amount of $40,000. The note bears interest at 5% per annum and is due on demand.

 

On January 15, 2014, VC entered into a promissory note with its CEO, Scott Silverman, in the principal amount of $60,000. The note bears interest at 5% per annum and is due on demand. On April 7, 2014, $8,500 of the note was repaid leaving a current balance of $51,500 outstanding.

 

On March 4, 2014, VC entered into a promissory note with its director, Daniel Penni, in the principal amount of $25,000. The note bears interest at 5% per annum and is due on demand.

 

 
40

 

 

Review, Approval or Ratification of Transactions with Related Parties 

 

Our audit committee’s charter requires review of any proposed related party transaction, conflicts of interest and any other transaction for which independent review is necessary or desirable to achieve the highest standards of corporate governance. It is also our unwritten policy, which policy is not otherwise evidenced, for any related party transaction that involves more than a de minimis obligation, expense or payment, to obtain approval by our board of directors prior to our entering into any such transaction. In conformity with our various policies on related party transactions, the above transaction discussed in this “Certain Relationships and Related Transactions” section had been reviewed and approved by our board of directors.

 

Director Independence

 

Currently, two members on our Board of Directors, Messrs. Edelstein and Wooden, are considered “independent” within the meaning of the listing standards of The Nasdaq Stock Market. Our other directors, Mr. Silverman, Mr. Krawitz and Mr. Penni, held or hold officer positions with us and accordingly they are not considered independent, even though Mr. Penni is not currently an employee or currently has any other relationship with us that would otherwise disqualify him as independent.

 

 

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

Audit and Non-Audit Fees 

 

For the fiscal years ended December 31, 2013 and 2012, fees for services provided by our principal accountant, EisnerAmper LLP, were as follows:

 

 

    2013    

2012

 

Audit Fees

  $ 72,250     $ 135,000  
                 

Audit-Related Fees (review of registration statements and other SEC filings)

     60,200        -  
                 
Assistance with research related to a proposed transaction     -        -  
                 

Tax Fees

     -        -  
                 

All Other Fees

     -        -  
                 

Total Fees

  $ 232,450     $ 135,000  

 

None of the services described above were approved pursuant to the exception provided in Rule 2-01(c)(7)(i)(C) of Regulation S-X promulgated by the SEC.

 

Compatibility of Fees 

 

The audit and committee of the board of directors has considered whether the provision of the services listed above is compatible with maintaining the independent registered public accounting firm’s independence and has concluded that the services did not interfere with the independent registered public accounting firm’s independence.

 

Pre-Approval Policies and Procedures 

 

The audit committee has a policy for the pre-approval of audit services, requiring its prior approval for all audit and non-audit services provided by our independent registered public accounting firm. Our independent registered public accounting firm may not provide certain prohibited services. The audit committee’s prior approval must be obtained before the scope or cost of pre-approved services is increased.

 

Consistent with these policies and procedures, the audit committee approved all of the services rendered by EisnerAmper LLP during fiscal years 2013 and 2012, as described above.

 

 
41

 

  

PART IV 

 

ITEM 15. EXHIBITS AND FINANCIAL STATEMENTS

 

(a)(1) 

 

The financial statements listed below are included in this report

     

  

 

Report of Independent Registered Public Accounting Firm

     

  

 

Financial Statements

     

  

 

Consolidated Balance Sheets

     
   

Consolidated Statements of Comprehensive Loss

     

  

 

Consolidated Statements of Operations

     

  

 

Consolidated Statements of Stockholders’ Equity

     

  

 

Consolidated Statements of Cash Flows

     

  

 

Notes to Consolidated Financial Statements

     

(a)(3) 

 

Exhibits

     

  

 

See the Exhibit Index filed as part of this Annual Report on Form 10-K.

 

 
42

 

 

SIGNATURES

 

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

VERITEQ CORPORATION

 

     

 

By: 

 /s/ Scott R. Silverman

 

Date: April 15, 2014

 

Scott R. Silverman

 

 

 

Chief Executive Officer

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

 

Signature

 

Title

 

Date

  

 

  

 

 

/s/ Scott R. Silverman

 

Chief Executive Officer and Chairman of the Board 

 

April 15, 2014

Scott R. Silverman

 

  

 

 

 

 

 

 

 

  

 

Chief Legal and Financial Officer and Director (Principal

 

 

/s/ Michael E. Krawitz

 

Financial Officer) 

 

April 15, 2014

Michael E. Krawitz

 

 

 

  

  

 

  

 

 

/s/ Barry M. Edelstein

 

Director

 

 

Barry M. Edelstein

 

  

 

April 15, 2014

 

/s/ Daniel E. Penni

 

Director

 

  

Daniel E. Penni

 

  

 

April 15, 2014

 

 

  

 

 

/s/ Shawn A. Wooden

 

 Director

 

  

Shawn A. Wooden

 

 

 

April 15, 2014   

 

 
43

 

 

EXHIBIT INDEX

 

 

2.1

 

Share Exchange Agreement dated as of June 24, 2013, among the Company, VeriTeQ and the VeriTeQ Shareholders (filed as Exhibit 2.1 to Registrant’s Current Report on Form 8-K filed with the Commission on June 25, 2013)

  

  

 

3.1

 

Amended and Restated Certificate of Incorporation of the Registrant (filed as Exhibit 3.1 to Registrant’s Current Report on Form 8-K filed with the Commission on October 24, 2013)

  

  

 

3.2 

 

Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 3.3 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on August 9, 2007)

  

  

 

3.3

 

Amended and Restated Bylaws of the Company (incorporated by reference to Exhibit 10.3 to Registrant’s Current Report on Form 8-K filed with the Commission on September 28, 2009)

  

  

 

3.4

 

Certificate of Designations of Series B Convertible Preferred Stock (filed as Exhibit 3.1 to Registrant’s Current Report on Form 8-K filed with the Commission on July 12, 2013)

  

  

 

3.5

 

Certificate of Designations of Series C Convertible Preferred Stock (filed as Exhibit 3.2 to Registrant’s Current Report on Form 8-K filed with the Commission on July 12, 2013)

  

  

 

3.6

 

Certificate of Elimination of the Series B Convertible Preferred Stock (filed as Exhibit 3.3 to Registrant’s Current Report on Form 8-K filed with the Commission on July 12, 2013)

  

  

 

4.1

 

Form of Warrant and Schedule of Holders (filed as Exhibit 4.1 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on November 14, 2013)

  

  

 

10.1 

 

Applied Digital Solutions, Inc. 1999 Flexible Stock Plan, as amended (incorporated herein by reference to Exhibit 4.2 to Registrant’s Registration Statement on Form S-8 (File No. 333-118776) filed with the Commission on September 3, 2004)

 

 

 

10.2

 

Amended and Restated Digital Angel Corporation Transition Stock Option Plan, as amended (incorporated herein by reference to Exhibit 4.1 to Registrant’s Registration Statement on Form S-8 (file No. 333-148958) filed with the Commission on January 31, 2008)

  

  

 

10.3 

 

Applied Digital Solutions, Inc. 1999 Employees Stock Purchase Plan, as amended (incorporated by reference to Exhibit 4.2 to Registrant’s Registration Statement on Form S-8 (File No. 333-126229) filed with the Commission on June 29, 2005)

  

  

 

10.4

 

Digital Angel Corporation 2003 Flexible Stock Plan, as Amended (incorporated by reference to Exhibit 4.1 to Registrant’s Registration Statement Under The Securities Act of 1933 on Form S-8 filed with the Commission on October 16, 2009)

  

  

  

10.5

 

Digital Angel Corporation 2013 Stock Incentive Plan (filed as Exhibit 10.3 to Registrant’s Current Report on Form 8-K filed with the Commission on July 12, 2013)

  

  

  

10.6

 

Indemnification Agreement between Digital Angel Corporation (“Parent”) and Patricia M. Petersen (“Indemnitee”) dated July 22, 2011 (incorporated by reference to Exhibit 10.4 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on August 19, 2011.)

  

  

  

10.7

 

Indemnification Agreement between Digital Angel Corporation (“Parent”) and Joseph J. Grillo (“Indemnitee”) dated July 22, 2011 (incorporated by reference to Exhibit 10.5 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on August 19, 2011)

 

10.8

 

Letter Agreement between Lorraine M. Breece and Digital Angel Corporation dated July 14, 2011 (incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with the Commission on August 4, 2011)

     

10.9

 

Indemnification Agreement between Digital Angel Corporation (“Parent”) and Daniel Penni (“Indemnitee”) dated February 1, 2012 (incorporated by reference to Exhibit 10.52 to Registrant’s Annual Report on Form 10-K filed with the Commission on March 29, 2012)

  

 

  

10.10

 

Indemnification Agreement between Digital Angel Corporation (“Parent”) and Lorraine Breece (“Indemnitee”) dated March 6, 2012 (incorporated by reference to Exhibit 10.54 to Registrant’s Annual Report on Form 10-K filed with the Commission on March 29, 2012)

  

 
44

 

 

10.11

 

Employment Agreement effective as of August 23, 2012 between Digital Angel Corporation and L. Michael Haller (incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with the Commission on August 28, 2012)

  

 

  

10.12

 

Amendment to Employment Agreement between Digital Angel Corporation and L. Michael Haller executed April 10, 2013 and effective on May 3, 2013 (filed as Exhibit 10.2 to Registrant’s Current Report on Form 8-K filed with the Commission on May 7, 2013)

  

 

  

10.13

 

Transition Services Agreement between Digital Angel Corporation and MGT Capital Investments, Inc. dated as of May 3, 2013(filed as Exhibit 10.2 to Registrant’s Current Report on Form 8-K filed with the Commission on May 7, 2013)

  

 

  

10.14

 

Asset Purchase Agreement by and between Digital Angel Corporation and MGT Capital Investments, Inc. dated April 10, 2013 (filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with the Commission on April 16, 2013)

  

 

  

10.15

 

Employment Agreement dated as of July 8, 2013, between the Company and Scott R. Silverman (filed as Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed with the Commission on July 12, 2013)

  

 

  

10.16

 

Employment Agreement dated as of July 8, 2013, between the Company and Randolph K. Geissler (filed as Exhibit 10.2 to Registrant’s Current Report on Form 8-K filed with the Commission on July 12, 2013)

  

 

  

10.17

 

Employment Agreement, effective as of January 1, 2012, between VeriTeQ Acquisition Corporation and Scott R. Silverman (filed as Exhibit 10.1 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on November 14, 2013)

  

 

  

10.18

 

Termination of Employment Agreement, effective July 7, 2013, between VeriTeQ Acquisition Corporation and Scott R. Silverman (filed as Exhibit 10.2 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on November 14, 2013)

  

 

  

10.19

 

Employment Agreement, dated January 2, 2013, but made effective as of September 1, 2012, between VeriTeQ Acquisition Corporation and Randolph K. Geissler (filed as Exhibit 10.3 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on November 14, 2013)

  

 

  

10.20

 

Termination of Employment Agreement, effective July 7, 2013, between VeriTeQ Acquisition Corporation and Randolph K. Geissler(filed as Exhibit 10.4 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on November 14, 2013)

  

 

  

10.21

 

Restricted Stock Award Agreement, dated January 22, 2013, between VeriTeQ Acquisition Corporation and Randolph K. Geissler (filed as Exhibit 10.5 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on November 14, 2013)

  

 

  

10.22

 

Amended and Restated Employment Agreement, dated as of November 14, 2013, between the Company and Scott R. Silverman (filed as Exhibit 10.6 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on November 14, 2013)

  

 

  

10.23

 

Amended and Restated Employment Agreement, dated as of November 14, 2013, between the Company and Randolph K. Geissler (filed as Exhibit 10.7 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on November 14, 2013)

  

 

  

10.24

 

Stock Purchase Agreement, dated January 11, 2012, by and between PositiveID Corporation and VeriTeQ Acquisition Corporation (filed as Exhibit 10.8 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on November 14, 2013)

  

 

  

10.25

 

Asset Purchase Agreement, dated August 28, 2012, by and between PositiveID Corporation and VeriTeQ Acquisition Corporation (filed as Exhibit 10.9 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on November 14, 2013)

     

10.26*

 

Development and Supply Agreement, effective April 2, 2009 by and between Medical Components, Inc. and VeriChip Corporation assumed by the Registrant under the terms of the Stock Purchase Agreement, dated January 11, 2012 by and between PositiveID Corporation and VeriTeQ Acquisition Corporation.

  

10.27

 

License Agreement, dated August 28, 2012, by and between PositiveID Corporation and VeriTeQ Acquisition Corporation (filed as Exhibit 10.10 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on November 14, 2013)

  

 
45

 

 

10.28

 

Letter Agreement, dated August 28, 2012, between PositiveID Corporation and VeriTeQ Acquisition Corporation (filed as Exhibit 10.11 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on November 14, 2013)

     

10.29

 

License Agreement, dated August 28, 2012, by and between PositiveID Corporation and VeriTeQ Acquisition Corporation (filed as Exhibit 10.10 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on November 14, 2013)

  

 

  

10.30

 

Secured Promissory Note, dated January 11, 2012, between VeriTeQ Acquisition Corporation as Borrower and PositiveID Corporation as Lender (filed as Exhibit 10.12 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on November 14, 2013)

  

 

  

10.31

 

Letter Agreement, dated April 22, 2013, between PositiveID Corporation and VeriTeQ Acquisition Corporation (filed as Exhibit 10.13 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on November 14, 2013)

  

 

  

10.32

 

Letter Agreement dated July 8, 2013, between PositiveID Corporation and VeriTeQ Acquisition Corporation (filed as Exhibit 10.4 to Registrant’s Current Report on Form 8-K filed with the Commission on July 12, 2013)

  

 

  

10.33

 

Asset Purchase Agreement, dated December 3, 2012, between SNC Holdings Corp. and VeriTeQ Acquisition Corporation (filed as Exhibit 10.15 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on November 14, 2013)

  

 

  

10.34

 

Bill of Sale, dated November 30, 2012 and effective December 3, 2012, by and between SNC Holdings Corp. and VTQ IP Holding Corporation (filed as Exhibit 10.16 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on November 14, 2013)

  

 

  

10.35

 

Assignment and Assumption Agreement, dated November 30, 2012 and effective December 3, 2013, by and between SNC Holdings Corp. and VeriTeQ Acquisition Corporation(filed as Exhibit 10.17 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on November 14, 2013)

  

 

  

10.36

 

Assignment and Assumption of Patents, dated November 30, 2012 and effective December 3, 2012, by and between SNC Holdings Corp. and VTQ IP Holding Corporation (filed as Exhibit 10.18 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on November 14, 2013)

  

 

  

10.37

 

Assignment and Assumption of Trademarks, dated November 28, 2012 and effective December 3, 2012, by and between SNC Holdings Corp. and VTQ IP Holdings Corporation (filed as Exhibit 10.19 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on November 14, 2013)

  

 

  

10.38

 

Royalty Agreement dated November 30, 2012 and effective December 3, 2012, by and between SNC Holdings Corp. and VeriTeQ Acquisition Corporation (filed as Exhibit 10.20 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on November 14, 2013)

     

10.39*

 

Sublicense Agreement, effective November 26, 2012 by and between VeriTeQ Acquisition Corporation and SNC Holdings Corp.

  

 

(k)  

10.40

 

Form of Security Agreement, dated November 28, 2012 and effective December 3, 2012, among SNC Holdings Corp., VeriTeQ Acquisition Corporation and VTQ IP Holdings Corporation (filed as Exhibit 10.21 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on November 14, 2013)

  

 

  

10.41

 

Non-Negotiable Secured Convertible Promissory Note dated December 3, 2012, between VeriTeQ Acquisition Corporation as Borrower and SNC Holding Corp. as Lender (filed as Exhibit 10.22 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on November 14, 2013)

  

 

  

10.42

 

First Amendment to Promissory Note, dated July 8, 2013, given by VeriTeQ Acquisition Corporation as Borrower in Favor of SNC Holding Corp.as Lender (filed as Exhibit 10.23 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on November 14, 2013)

  

 

  

10.43

 

Promissory Note, dated April 10, 2013, among VeriTeQ Acquisition Corporation as Borrower and Randolph Geissler/Donald Brattain as Lenders (filed as Exhibit 10.25 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on November 14, 2013)

  

 
46

 

 

10.44

 

Promissory Note, dated October 11, 2013, between VeriTeQ Acquisition Corporation as Borrower and Scott R. Silverman as Lender (filed as Exhibit 10.26 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on November 14, 2013)

  

 

  

10.45

 

Promissory Note, dated October 29, 2013, between the Registrant as Borrower and Scott R. Silverman as Lender (filed as Exhibit 10.27 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on November 14, 2013)

 

10.46

Letter Agreement dated November 8, 2013, between VeriTeQ Acquisition Corporation and PositiveID Corporation (filed as Exhibit 10.28 to Registrant’s Quarterly Report on Form 10-Q filed with the Commission on November 14, 2013)

  

  

10.47

Securities Purchase Agreement, dated November 13, 2013, by and among the Registrant and Certain Institutional Investors (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on November 14, 2013)

  

  

10.48

Form of Senior Convertible Note, dated November 13, 2013, by and among the Registrant and Certain Institutional Investors (filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the Commission on November 14, 2013)

  

  

10.49

Form of Warrant, dated November 13, 2013, by and among the Registrant and Certain Institutional Investors (filed as Exhibit 10.3 to the Registrant’s Current Report on Form 8-K file with the Commission on November 14, 2013)

  

  

10.50

Form of Registration Rights Agreement, dated November 13, 2013, by and among the Registrant and Certain Institutional Investors (filed as Exhibit 10.4 to the Registrant’s Current Report on Form 8-K file with the Commission on November 14, 2013) 

  

  

10.51

Form of Lock-Up Agreement, dated November 13, 2013, by and among the Registrant and Certain Institutional Investors (filed as Exhibit 10.5 to the Registrant’s Current Report on Form 8-K file with the Commission on November 14, 2013)

  

  

10.52

Security Agreement, dated November 13, 2013, by and among the Registrant and Certain Institutional Investors (filed as Exhibit 10.6 to the Registrant’s Current Report on Form 8-K file with the Commission on November 14, 2013)

  

  

10.53

Guaranty, dated November 13, 2013, by and among the Registrant and Certain Institutional Investors (filed as Exhibit 10.7 to the Registrant’s Current Report on Form 8-K file with the Commission on November 14, 2013)

  

  

10.54*

Stock Purchase Agreement, dated November 21, 2013, by and among the Registrant and Hudson Bay Master Fund Ltd.

   

10.55 

Promissory Note, dated January 8, 2014, between the Registrant as Borrower and Michael E. Krawitz as Lender (filed as Exhibit 10.54 to the Registrant’s Registration Statement on Form S-1/A filed with the Commission January 17, 2014)    

 

 

10.56 

Promissory Note, dated January 16, 2014, between the Registrant as Borrower and Scott R. Silverman as Lender (filed as Exhibit 10.55 to the Registrant’s Registration Statement on Form S-1/A filed with the Commission January 17, 2014)   

 

 

10.57 

Promissory Note, dated January 16, 2014, between the Registrant as Borrower and Randolph K. Geissler as Lender  (filed as Exhibit 10.56 to the Registrant’s Registration Statement on Form S-1/A filed with the Commission January 17, 2014)

 

 

10.58 

Promissory Note, dated February 4, 2014, between the Registrant as Borrower and Corbin Properties LLC (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the Commission on February 5, 2014)

  

 
47

 

 

10.59 

Employment Agreement between the Company and Michael E. Krawitz effective January 31, 2014 (filed as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the Commission on February 5, 2014)

   

10.60* 

Development and Supply Agreement, dated September 21, 2012 by and between VeriTeQ Acquisition Corporation and Establishment Labs, S.A.

 

 

10.61* 

Letter Agreement between the Registrant and the Buyers of Digital Angel Radio Communications Limited effective January 30, 2014

   

10.62*

Promissory Note, dated March 4, 2014, between the Registrant as Borrower and Daniel Penni as Lender 

 

 

10.63* 

Springing Promissory Note, dated March 6, 2014, between the Registrant as Borrower and James Rybicki Trust as Lender

 

 

10.64* 

Springing Promissory Note, dated March 5, 2014, between the Registrant as Borrower and Deephaven Enterprises, Inc. as Lender

 

 

10.65* 

Springing Promissory Note, dated March 10, 2014 between the Registrant as Borrower and William Caragol as Lender 

   

10.66* 

Springing Promissory Note, dated March 20, 2014 between the Registrant as Borrower and Deephaven Enterprises, Inc. as Lender 

   

21.1* 

List of Subsidiaries

   
23.1* Consent of EisnerAmper LLP

 

31.1*

Certification by Scott R. Silverman, Chief Executive Officer, pursuant to Exchange Act Rules 13A-14(a) and 15d-14(a)

 

31.2*

Certification by Michael E. Krawitz, Chief Financial Officer, pursuant to Exchange Act Rules 13A-14(a) and 15d-14(a)

 

 

32.1*

Certification by Scott R. Silverman Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

   

32.2*

Certification by Michael E. Krawitz Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

101.INS*

XBRL Instance

101.SCH*

XBRL Taxonomy Extension Schema

101.CAL*

XBRL Taxonomy Extension Calculation

101.DEF*

XBRL Taxonomy Extension Definition

101.LAB*

XBRL Taxonomy Extension Labels

101.PRE*

XBRL Taxonomy Extension Presentation

 

 

*

 

Filed herewith.

 

 
48 

 

 

VERITEQ CORPORATION AND SUBSIDIARIES

(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS

 

CONTENTS 

 

 

 

Page

 

 

Report of Independent Registered Public Accounting Firm

F-2

 

 

Consolidated Balance Sheets as of December 31, 2013 and 2012

F-3

 

 

Consolidated Statements of Operations for each of the years in the two-year period ended December 31, 2013 and for the period from December 14, 2011 (Inception) to December 31, 2013

F-4

 

 

Consolidated Statement of Comprehensive Loss for each of the years in the two-year period ended December 31, 2013 and for the period from December 14, 2011 (Inception) to December 31, 2013

F-5

   

Consolidated Statements of Stockholders’ Deficit From December 14, 2011 (inception) to December 31, 2013

F-6

 

 

Consolidated Statements of Cash Flows for each of the years in the two-year period ended December 31, 2013 and for the period from December 14, 2011 (Inception) to December 31, 2013

F-8

 

 

Notes to Consolidated Financial Statements

F-9

 

 
 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Board of Directors and Stockholders

VeriTeQ Corporation

 

We have audited the accompanying consolidated balance sheets of VeriTeQ Corporation (a development stage company, formerly known as Digital Angel Corporation) and subsidiaries (the “Company”) as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive loss, changes in stockholders’ deficit and cash flows for each of the years in the two-year period ended December 31, 2013 and for the period from December 14, 2011 (inception) to December 31, 2013. The consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of VeriTeQ Corporation and subsidiaries as of December 31, 2013 and 2012, and the consolidated results of their operations and their cash flows for each of the years in the two-year period ended December 31, 2013 and from December 14, 2011 (inception) to December 31, 2013 in conformity with accounting principles generally accepted in the United States.

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has incurred recurring net losses, and at December 31, 2013 had negative working capital and a stockholders’ deficit. These events and conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

 

 

 

/s/ EisnerAmper LLP

 

New York, New York

April 15, 2014

 

 
F-2

 

 

VERITEQ CORPORATION AND SUBSIDIARIES

(formerly known as Digital Angel Corporation)

 (A Development Stage Company)

Consolidated Balance Sheets

(in thousands, except par value)

 

   

December 31,

   

December 31,

 
   

2013

   

2012

 

ASSETS

               

Current assets:

               

Cash

  $ 13     $ 183  

Restricted cash

    882        

Inventory

    21        

Other receivable

    171        

Other current assets

    96        

Total current assets

    1,183       183  
                 

Property and equipment, net

    4        

Other assets

    14        

Intangible assets, net

    7,018       7,612  

Total assets

  $ 8,219     $ 7,795  
                 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

               

Current liabilities:

               

Notes payable, net of discounts (including $60 and $232 to related parties, respectively)

  $ 467     $ 326  

Accounts payable

    854       82  

Accrued expenses (including $1,764 and $724 to related parties, respectively)

    2,718       1,072  

Due to related party under shared services agreement

    211       138  

Total current liabilities

    4,250       1,618  
                 

Commitments and contingencies

               

Note payable to related party, net of discount

          78  

Subordinated convertible debt with an embedded convertible option, at fair value

    4,925       2,137  

Warrant liabilities

    6,114        

Contingent consideration – Estimated royalty obligations

    3,940       4,000  

Total liabilities

    19,229       7,833  
                 

Stockholders’ deficit:

               

Preferred Stock ($10 par value; shares authorized 5,000; 0 shares issued and outstanding)

           

Common shares ($.01 par value; shares authorized 50,000; shares issued and outstanding, 9,459 and 7,021, respectively)

    95       70  

Additional paid-in-capital

    5,595       1,515  

Accumulated deficit during the development stage

    (16,700

)

    (1,623

)

Total stockholders’ deficit

    (11,010

)

    (38

)

Total liabilities and stockholders’ deficit

  $ 8,219     $ 7,795  

 

See the accompanying notes to consolidated financial statements. 

 

 
F-3

 

  

VERITEQ CORPORATION AND SUBSIDIARIES

(formerly known as Digital Angel Corporation)

(A Development Stage Company)

Consolidated Statements of Operations

 (in thousands, except per share data)

 

 

 

   

For the Year

Ended

December 31,

2013

   

For the Year

Ended

December 31,

2012

   

From

December 14, 2011 (Inception)

to December 31,

2013

 
                         

Sales

    18             18  

Cost of goods sold

    7             7  
                         

Gross margin

    11             11  
                         

Operating Expenses:

                       
                         

Selling, general and administrative expenses

  $ 5,994     $ 2,064     $ 8,076  

Depreciation and amortization expense

    595       208       803  

Total operating expenses

    6,589       2,272       8,879  

Other expense

    4,164             4,164  

Interest expense

    4,335       133       4,468  
                         

Loss before income taxes

    (15,077

)

    (2,405

)

    (17,500

)

Benefit for income taxes

          800       800  
                         

Net loss

  $ (15,077

)

  $ (1,605

)

  $ (16,700

)

                         

Net loss per common share — basic and diluted

  $ (1.75

)

  $ (0.25

)

     
                         

Weighted average number of common shares outstanding — basic and diluted

    8,607       6,529        

 

See the accompanying notes to consolidated financial statements. 

 

 
F-4

 

 

VERRITEQ CORPORATION AND SUBSIDIARIES

(formerly known as Digital Angel Corporation)

(A Development Stage Company)

Consolidated Statements of Comprehensive Loss

 (in thousands)

 

 

 

 

   

Year Ended

December 31,

   

From

December 14, 2011 (Inception)

to December 31,

2013

 
   

2013

   

2012