10-Q 1 f10q0915_veriteqcorp.htm QUARTERLY REPORT

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended September 30, 2015

 

☐  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
Incorporation or Organization)

  (I.R.S. Employer
Identification Number)
     
3333 S. Congress Avenue,
Suite 401, Delray Beach, Florida
  33445
(Address of Principal Executive Offices)   (Zip Code)

 

(561) 846-7000

Registrant’s Telephone Number, Including Area Code

 

 

 

N/A

(Former Name, Former Address and Formal Fiscal Year, if Changed Since Last Report)

 

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  þ

 

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

 

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 (check one).

 

Large accelerated filer  ☐ Accelerated filer  ☐ Non-accelerated filer  ☐ Smaller reporting company  þ
    (Do not check if 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  þ   No  ☐

 

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

 

Class   March 11, 2016
Common Stock, $0.00001 par value per share   250,723,718 shares

 

 

  

 

 

 

VERITEQ CORPORATION AND SUBSIDIARIES

 

TABLE OF CONTENTS

 

    Page
  PART I – Financial Information
     
Item 1. Financial Statements (unaudited):  
  Condensed Consolidated Balance Sheets – As of September 30, 2015 and December 31, 2014 3
  Condensed Consolidated Statements of Operations – Three and Nine Months ended September 30, 2015 and 2014 4
  Condensed Consolidated Statement of Changes in Stockholders’ Deficit – For the nine months ended September 30, 2015 5
  Condensed Consolidated Statements of Cash Flows – Nine Months ended September 30, 2015 and 2014 6
  Notes to Condensed Consolidated Financial Statements 7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk 26
Item 4.  Controls and Procedures 26
     
  PART II – Other Information
Item 1. Legal Proceedings 27
Item 1A. Risk Factors 27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 27
Item 5. Other Information 27
Item 6. Exhibits 27
  Signature 28

  

 2 

 

 

VERITEQ CORPORATION AND SUBSIDIARIES

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Condensed Consolidated Balance Sheets

(in thousands, except par value)

 

   September 30, 2015   December 31,  2014 
   (unaudited)     
ASSETS        
Current assets:        
Cash  $3   $77 
Restricted cash   12    12 
Accounts receivable   -    11 
Inventory   -    2 
Other current assets   12    84 
Total current assets   27    186 
           
Property and equipment, net   26    35 
Other assets   54    54 
Intangible assets, net   973    1,470 
Total assets  $1,080   $1,745 
           
LIABILITIES AND STOCKHOLDERS' DEFICIT          
Current liabilities:          
Accounts payable  $1,275   $1,141 
Accrued expenses (including $1,341 and $1,171 to related parties)   3,221    2,511 
Notes payable, current portion, net of discounts (including $966 and $152 to related parties)   4,811    2,480 
Liabilities for conversion options of convertible notes   6,246    930 
Subordinated debt with an embedded conversion option, at fair value   490    316 
Total current liabilities   16,043    7,378 
           
Notes payable, net of discount   -    286 
Warrant liabilities at fair value   2,086    534 
Estimated royalty obligations   440    440 
Total liabilities   18,569    8,638 
           
Commitments and contingencies (note 10)          
           
Series D preferred stock ($0.01 par value; 1,841 shares outstanding)   1,841    1,841 
           
Stockholders' deficit:          
Preferred stock ($0.01 par value; 5 million shares authorized; 0 issued and outstanding   -    - 
Common stock ($0.00001 par value; 100 billion shares authorized; 250,724 and * shares issued and outstanding)   3    - 
Additional paid-in capital   22,106    15,000 
Accumulated deficit   (41,439)   (23,734)
Total stockholders' deficit   (19,330)   (8,734)
Total liabilities and stockholders' deficit  $1,080   $1,745 

 

* At December 31, 2014 the Company had 30 shares (unrounded) outstanding after giving retroactive effect to the reverse splits of 1:1,000 on February 11, 2015 and 1:10,000 on July 29, 2015

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 3 

 

 

VERITEQ CORPORATION AND SUBSIDIARIES

 

Condensed Consolidated Statements of Operations (unaudited)

 (in thousands, except per share data)

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2015   2014   2015   2014 
Sales  $4   $44   $287   $139 
Cost of goods sold, exclusive of depreciation  and amortization shown separately below   3    11    124    57 
Gross profit   1    33    163    82 
                     
Operating Expenses:                    
Selling, general and administrative expenses   6,941    1,444    8,789    3,913 
Development expenses   53    98    157    237 
Asset impairment charge   -    -    380    - 
Depreciation and amortization expense   29    150    122    448 
Total operating expenses   7,023    1,692    9,448    4,598 
                     
Operating loss   (7,022)   (1,659)   (9,285)   (4,516)
Other (expenses) income                    
Interest expense   (901)   (492)   (1,591)   (2,084)
Change in fair value of derivative and other fair valued instruments, net   (4,173)   1,258    (6,835)   4,836 
Other income (expense)   -    -    6    (62)
Total other (expense) income   (5,074)   766    (8,420)   2,690 
                     
Loss before income taxes   (12,096)   (893)   (17,705)   (1,826)
Income tax benefit   -    -    -    - 
Net loss  $(12,096)  $(893)  $(17,705)  $(1,826)
                     
Net loss per common share -                    
Basic and diluted  $(0.09)  $(173,963)  $(0.39)  $(727,690)
                     
Weighted average common shares outstanding -                    
Basic and diluted   133,772    0.0051    45,150    0.0025 

  

The accompanying notes are an integral part of these condensed consolidated financial statements. 

  

 4 

 

 

VERITEQ CORPORATION AND SUBSIDIARIES

 

Condensed Consolidated Statement of Changes in Stockholders’ Deficit

For the Nine Months Ended September 30, 2015

(in thousands)

 

   Preferred Stock  Common Stock  Additional
Paid-in
   Accumulated    Total  
Stockholders'
 
    Number    Amount   Number    Amount   Capital   Deficit   Deficit 
Balance at December 31, 2014  -  $-   *   $-  $15,000  $(23,734) $(8,734)
Net loss  -   -  -   -   -   (17,705)  (17,705)
Issuance of common stock for partial conversion of notes payable  and accrued interest  -   -  488   -   658   -   658 
Sale of common stock to related parties         1       20       20 
Stock options issued to employees                 5,346   -   5,346 
Issuance of restricted stock to officers and directors         250,000   3   871   -   874 
Settlement of liabilities with related party         11       32   -   32 
Issuance of common stock for  cashless exercise of warrants  -   -  224   -   11   -   11 
Reclassification of conversion option liabilities upon conversion  of notes payable  -   -  -   -   168   -   168 
Balance at September 30, 2015 (unaudited)  -   -  250,724   3   22,106   (41,439)  (19,330)

* At December 31, 2014 the Company had 30 shares (unrounded) outstanding after giving retroactive effect to the reverse splits of 1:1,000 on February 11, 2015 and 1:10,000 on July 29, 2015

 

The accompanying notes are an integral part of these condensed consolidated financial statements. 

  

 5 

 

 

VERITEQ CORPORATION AND SUBSIDIARIES

 

Condensed Consolidated Statements of Cash Flows (unaudited)

(in thousands) 

 

   For the Nine Months Ended September 30, 
   2015   2014 
Cash flows from operating activities:          
Net loss  $(17,705)  $(1,826)
Adjustments to reconcile net loss to net cash used in operating activites:          
Stock-based compensation   6,220    565 
Deprecation and amortization   122    448 
Non-cash interest charges   1,328    2,004 
Asset impairment charge   380    - 
Issuance of common stock for services   -    337 
Change in fair value of subordinated convertible debt   174    (2,726)
Change in fair value of conversion options embedded in convertible notes   5,098    (3,404)
Change in fair value of warrants   1,563    1,294 
Gain on extinguishment of debt   (9)   - 
Loss on disposal of fixed assets   4    - 
Loss on settlement of other receivable   -    56 
Increase (decrease) in cash attributable to changes in operating assets and liabilities:          
Accounts payable and accrued expenses   1,804    1,213 
Other receivable   -    115 
Other current assets   28    47 
Accounts receivable   11    (24)
Other assets   -    (37)
Net cash used in operating activities   (982)   (1,938)
           
Cash flows from investing activities:          
Purchases of property and equipment   (1)   (20)
Net cash used in investing activities   (1)   (20)
           
Cash flows from financing activities:          
Proceeds from the issuance of convertible notes payable and warrants   984    1,354 
Proceeds from the issuance of related party notes and advances   137    235 
Repayment of convertible notes   (95)   (400)
Repayment of related party notes and advances   (137)   (90)
Proceeds from the issuance of common stock to related parties   20    - 
Decrease in restricted cash   -    870 
Net cash provided by financing activities   909    1,969 
           
Net (decrease) increase in cash   (74)   11 
Cash and cash equivalents - beginning of period   77    13 
Cash and cash equivalents - end of period  $3   $24 

 

The accompanying notes are an integral part of these condensed consolidated financial statements. 

 

 6 

 

 

VERITEQ CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited)

September 30, 2015

 

1. ORGANIZATION, BASIS OF PRESENTATION AND SUMMARY OF SELECTED SIGNIFICANT ACCOUNTING POLICIES 

 

Organization and Basis of Presentation

 

These unaudited condensed consolidated financial statements and notes thereto include the financial statements of VeriTeQ Corporation (“VC”), a Delaware corporation, and its wholly-owned subsidiary, VeriTeQ Acquisition Corporation (“VAC”), a Florida corporation. VC, VAC and VAC’s inactive VTQ IP Holding Corporation and PositiveID Animal Health Corporation subsidiaries are referred to together as “VeriTeQ” or “the Company.” The Company’s business was comprised of ongoing efforts to provide implantable medical device identification.

 

The accompanying unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014. These condensed consolidated interim financial statements have been prepared in accordance the instructions to Form 10-Q and Article 8 of Regulation S-X of the U.S. Securities and Exchange Commission (the “SEC”) and therefore omit or condense certain footnotes and other information normally included in consolidated interim financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). All intercompany balances and transactions have been eliminated in consolidation. In the opinion of the Company’s management, all adjustments (consisting of normal recurring adjustments) considered necessary for the fair presentation of the condensed consolidated interim financial statements have been made. Results of operations reported for interim periods may not be indicative of the results for the entire year.

 

In addition, certain prior year balances have been reclassified to conform to the current presentation. Specifically, the Change in fair value of convertible debt with embedded option feature, Change in fair value of conversion option of the convertible notes and Change in fair value of warrant liabilities for the three and nine months ended September 30, 2014, which had been reflected as separate line items in the consolidated statements of operations, are now reflected in Change in fair value of derivative and other fair valued instruments in the accompanying consolidated statements of operations.

 

Going Concern

 

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The Company has incurred significant operating losses since its inception on December 14, 2011 and had a working capital deficit and accumulated deficit at September 30, 2015 of $16.0 million and $41.4 million, respectively. The Company’s cash position is critically deficient, and payments essential to the Company’s ability to operate are not being made in the ordinary course of business. Failure to raise capital in the coming days to fund the Company’s operations and failure to generate positive cash flow to fund such operations in the future will have a material adverse effect on the Company’s financial condition. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments to the classification of recorded asset amounts or the amounts and classification of liabilities that might result from this uncertainty. The auditor’s report on the Company’s financial statements for the years ended December 31, 2014 and 2013 expressed substantial doubt about the Company’s ability to continue as a going concern.

 

The Company needs to raise additional funds immediately and continue to raise funds until it begins to generate sufficient cash from operations, and it may not be able to obtain the necessary financing on acceptable terms, or at all. During the nine months ended September 30, 2015, the Company raised approximately $0.9 million, net of repayments, from the sale of convertible promissory notes (see note 4).

 

On October 19, 2015, the Company received a default notice from its senior lender demanding repayment of approximately $2.1 million of indebtedness, secured by substantially all of the Company’s assets, which the Company was unable to repay. The Company also received a Notice of Disposition of Collateral advising the Company that the senior lender, acting as collateral agent, intended to sell the assets at auction. On November 4, 2015, the Company’s assets were sold at auction for the sum of $1 million, which was credited against the Company’s outstanding senior debt (see note 12).

 

As of the date of this report, the Company has ceased its business operations. The Company currently intends to attempt to acquire, merge or combine with and/or acquire the operating assets of an operating business (see note 12).

 

 7 

 

 

VERITEQ CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited)

September 30, 2015

 

Reverse Stock Splits and Change in Par Value of Common Stock

 

On December 18, 2014, an amendment to the Company’s Amended and Restated Certificate of Incorporation to effect a reverse split of all of the outstanding shares of the Company’s common stock at a ratio of 1 for 1,000 was approved by the Company’s Stockholders. The Certificate of Amendment became effective on February 11, 2015, and at that time each 1,000 shares of outstanding common stock of the Company was combined and automatically converted into one share of the Company’s common stock, with a par value of $0.00001 per share (the “February 2015 Reverse Stock Split”). In addition, the conversion and exercise prices of all of the Company’s outstanding preferred stock, common stock purchase warrants, stock options and convertible notes payable were proportionately adjusted at the 1:1,000 reverse split ratio consistent with the terms of such instruments. No fractional shares were issued as a result of the February 2015 Reverse Stock Split, and shareholders received a cash payment in lieu of such fractional shares that they would otherwise be entitled.

 

Also on December 18, 2014, the Company’s stockholders approved an amendment to the Company’s Amended and Restated Certificate of Incorporation to (i) reduce the par value of the Company’s common stock from $0.01 per share to $0.00001 per share; and (ii) increase the number of shares of common stock that the Company is authorized to issue from 500 million to 10 billion. This amendment became effective on December 18, 2014.

 

On July 29, 2015, another amendment to the Company’s Amended and Restated Certificate of Incorporation became effective to implement a 1-for-10,000 reverse stock split (the “July 2015 Reverse Stock Split”) of the Company’s common stock. As a result, each 10,000 shares of the Company’s issued and outstanding common stock automatically, and without any action on the part of the respective holders, were combined and converted into one issued and outstanding share of common stock. The July 2015 Reverse Stock Split resulted in a reduction in the number of issued and outstanding shares of the Company’s common stock from approximately 4.4 billion to approximately 446,000. The July 2015 Reverse Stock Split affected all issued and outstanding shares of the Company's common stock, as well as all common stock underlying convertible notes, warrants, convertible preferred stock and stock options outstanding immediately prior to the July 2015 Reverse Stock Split. The amendment also increased the number of shares of common stock that the Company is authorized to issue from 10 billion to 100 billion. The Amendment was approved by the Company’s Board of Directors and ratified by the Company’s stockholders on May 26, 2015.

 

All share, per share and capital stock amounts as of September 30, 2015 and December 31, 2014, and for the three and nine months ended September 30, 2015 and 2014 have been retroactively restated to give effect to the July 2015 Reverse Stock Split, the February 2015 Reverse Stock Split and the change in the par value of the Company’s common stock.

 

Use of Estimates 

 

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the year. Actual results could be affected by those estimates. Included in these estimates are assumptions used in determining the lives and valuation of long-lived assets, in valuation models used in estimating the fair value of certain promissory notes, warrants, embedded conversion options, stock-based compensation and in determining valuation allowances for deferred tax assets.

   

Property and Equipment

 

Property and equipment consists primarily of machinery and computer equipment and is stated at cost less accumulated depreciation. Depreciation expense is computed using the straight-line method over the estimated useful life of the related assets, generally ranging from 3 to 10 years. Depreciation expense for the three and nine months ended September 30, 2015 was approximately $2,000 and $6,000, respectively. Depreciation for the three and nine months ended September 30, 2014 was approximately $1,000 and $2,000, respectively.

  

 8 

 

 

VERITEQ CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited)

September 30, 2015

 

Intangible Assets 

 

The Company’s intangible assets (see note 2) are amortized on a straight-line basis over their expected economic lives ranging from 7 to 14 years. The lives were determined based upon the expected use of the asset, the ability to extend or renew patents, trademarks and other contractual provisions associated with the asset, the stability of the industry, expected changes in and replacement value of distribution networks and other factors deemed appropriate. The Company reviews its intangible assets and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. If an impairment indicator is present, the Company evaluates recoverability by a comparison of the carrying amount of the assets to future undiscounted net cash flows expected to be generated by the assets. If the carrying value of the asset exceeds the projected undiscounted cash flows, the Company is required to estimate the fair value of the asset and recognize an impairment charge to the extent that the carrying value of the asset exceeds its estimated fair value. The Company recorded an impairment charge of $0.4 million for the three and nine months ended September 30, 2015 and did not record any impairment charges during the three and nine months ended September 30, 2014.

 

Revenue Recognition

 

Product revenue is recognized at the time product is shipped and title has transferred, provided that a purchase order has been received or a contract has been executed, there are no uncertainties regarding customer acceptance, the sales price is fixed and determinable and collectability is deemed probable. Cost of products sold is recorded as the related revenue is recognized.

 

Income Taxes 

 

The Company recognizes deferred tax liabilities and assets based on the temporary differences between the financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts, based on enacted tax laws and rates in effect for the year in which the differences are expected to affect taxable income. 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 when the Company determines it is more likely than not that it will fail to generate sufficient taxable income to be able to realize the deferred tax assets.

 

In accordance with U.S. GAAP, the Company is required to determine whether a tax position of the Company is more likely than not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Derecognition of a tax benefit previously recognized could result in the Company recording a tax liability that would reduce net assets. Based on its analysis, the Company has determined that it has not incurred any liability for unrecognized tax benefits as of September 30, 2015 and December 31, 2014.

 

Concentration

 

All of the Company’s revenue and accounts receivable are from a single customer, Establishment Labs, SA.

 

Loss per Common Share and Common Share Equivalent 

 

Basic loss per share excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted loss per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the income of the Company. The following securities were excluded in the computation of dilutive loss per share for the nine months ended September 30, 2015 and 2014 because their inclusion would have been anti-dilutive:

 

   2015   2014 
Stock options   148,500,000    - 
Warrants   67,180,577    109 
Shares issuable upon conversion of preferred stock   46,964,286    - 
Shares issuable upon conversion of convertible notes payable   150,713,794    76 
    413,358,657    185 

 

 9 

 

 

VERITEQ CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited)

September 30, 2015

 

Impact of Recently Issued Accounting Standards 

 

From time to time, the Financial Accounting Standards Board (the “FASB”) or other standards setting bodies will issue new accounting pronouncements. Updates to the FASB Accounting Standards Codification (“ASC”) are communicated through issuance of an Accounting Standards Update (“ASU”).

   

2. INTANGIBLE ASSETS 

 

Intangible assets consist of the following:

 

   September 30, 2015   December 31, 2014 
   Gross Carrying   Accumulated       Gross Carrying   Accumulated     
($000's)  Amount   Amortization   Total   Amount   Amortization   Total 
                         
Proprietary Technology  $1,372   $(399)  $973   $1,500   $(318)  $1,182 
Customer relationship   248    (248)   -    500    (212)   288 
   $1,620   $(647)  $973   $2,000   $(530)  $1,470 

  

As of September 30, 2015, the Company determined that its customer relationship intangible asset was fully impaired, and that the fair value of its proprietary technology was $1.0 million (see note 12). As a result, the Company recognized impairment charges aggregating to $0.4 million to write these assets down to their fair values. Amortization of intangibles charged against income amounted to $27,000 and $0.1 million for the three-months ended September 30, 2015 and 2014, respectively, and $0.1 million and $0.4 million for the nine months ended September 30, 2015 and 2014, respectively.

 

3. ACCRUED EXPENSES

 

The following table summarizes the significant components of accrued expenses:

 

  

September 30,

2015

  

December 31,

2014

 
   (in thousands) 
Accrued payroll and payroll related (including $1,217 and $1,060 to related parties)  $1,608   $1,204 
Accrued legal   466    477 
Accrued other expenses (including $124 and $111 to related parties)   1,147    830 
Total accrued expenses  $3,221   $2,511 

  

During the nine months ended September 30, 2015, the Company entered into separate agreements with Scott Silverman, the Company’s Chief Executive Officer, Randolph Geissler, the Company’s President, Michael Krawitz, the Company’s Chief Legal and Financial Officer and one other executive officer, (collectively, the “Executive Officers”) whereby each Executive Officer agreed that certain amounts of accrued but unpaid compensation that each individual was entitled to receive (aggregating approximately $914,000) would be paid in the form of a convertible promissory note (the “Officer Notes”). In connection with these agreements, the Company issued Officer Notes to Messrs. Silverman, Geissler, Krawitz and the other executive officer in the principal amounts of $194,010, $285,000, $384,509 and $50,000, respectively.

 

 10 

 

 

VERITEQ CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited)

September 30, 2015

 

4. NOTES PAYABLE

 

Notes payable at September 30, 2015 and December 31, 2014 consist of the following:

 

   September 30, 2015   December 31, 2014 
   (in thousands) 
Convertible notes payable with a bifurcated conversion option   3,785    2,943 
Related party and Officer Notes   1,045    169 
Other notes payable   176    185 
Discount on notes payable   (195)   (531)
    4,811    2,766 
Less current portion   (4,811)   (2,480)
Non-current notes payable   -    286 

  

Convertible Notes with a Bifurcated Conversion Option

 

During the nine months ended September 30, 2015, the Company issued convertible promissory notes in the aggregate principal amount of $1,086,962, and received net proceeds of $984,106. These notes are generally due one year after the date of issuance, bear interest at rates of 1% to 12% per annum, and are convertible into shares of common stock at 57% to 61% of the market price of the Company’s common stock based on the low end of the trading range of the common stock during the 10 to 30 days prior to conversion, depending on the specific note being converted.

 

With respect to the foregoing notes, in the event the Company were to issue or sell, or is deemed to have issued or sold, any shares of common stock for a consideration per share (the “New Issuance Price”) that is less than the conversion price in effect immediately prior to such issue or sale or deemed issuance or sale (a “Dilutive Issuance”), then, immediately after such Dilutive Issuance, the conversion price then in effect is reduced to an amount equal to the New Issuance Price.

 

In connection with the issuance of one of the foregoing notes, the Company issued a warrant to purchase 50 shares of the Company’s common stock at an exercise price of $210 per share, subject to adjustment for stock splits, stock dividends and stock combinations (the “March 2015 Warrant”). The March 2015 Warrant is exercisable at any time until three years after the date of issuance. The terms of the warrant provides for a proportional downward adjustment of the exercise price in the event that the Company issues or sells, or is deemed to have issued or sold, shares of common stock at an issuance price that is less than the market price of the common stock at the time of issuance, as defined in the warrant agreement. The Company determined that the fair value of the March 2015 Warrant was de minimus at the date of issuance and at September 30, 2015.

 

During the nine months ending September 30, 2015, $597,474 of previously issued convertible notes, along with $10,375 of accrued interest, were converted into 461,247 shares of the Company’s common stock, and $94,675 of convertible notes were repaid in accordance with their terms. In connection with the notes converted, approximately $168,000 of the bifurcated option liability was reclassified into additional paid-in capital. Also during the nine months ending September 30, 2015, the Company entered into a settlement agreement with one of its convertible noteholders which reduced the outstanding principal balance on their notes by $9,375, which was recorded as a gain on the settlement of debt and is reflected in other income in the accompanying consolidated statements of operations for the three and nine months ended September 30, 2015. In addition, the Company received additional notices for the conversion of $3,860 convertible notes that the Company was unable to honor.

 

The Company’s failure to (i) timely file its Quarterly Report on Form 10-Q for the period ending June 30, 2015 with SEC, (ii) repay certain convertible notes that had reached their maturity date and (iii) honor the foregoing conversion notices, constitute events of default under the terms of the convertible notes. The terms of some of the convertible notes require that the outstanding principal amount on the notes increase by as much as 50% in the event of a default. As a result, the Company recorded additional principal on these notes and a corresponding non-cash interest charge in the amount of $456,684. At September 30, 2015, the outstanding balance on these convertible notes was $3,785,514.

 

 11 

 

 

VERITEQ CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited)

September 30, 2015

 

As more fully described in note 12, on October 19, 2015, the Company received a default notice from its senior lender, acting in its capacity as collateral agent representing approximately $2.2 million of senior convertible notes with first priority security interests on the Company’s assets, demanding repayment of these notes. The Company did not have the financial resources to repay this indebtedness. In conjunction with the default notice, the Company received a Notification of Disposition of Collateral, advising the Company that the senior lender intended to sell, lease or license the assets securing the senior convertible notes at a public auction. The auction took place on November 4, 2015 and the senior lender received proceeds of $1.0 million, which was credited against the Company’s outstanding balance of convertible notes. The remaining outstanding convertible notes currently accrue default interest at rates ranging from of 18% to 22% per annum, and the holders of the notes retain their right to convert the outstanding principal plus accrued and unpaid interest into shares of the Company’s common stock in accordance with the terms of the notes.

 

Related Party Notes Payable

 

On January 23, 2015, the Company borrowed $45,000 from Scott Silverman, as evidenced by a promissory note (the “2015 Silverman Note”). The 2015 Silverman Note was payable on demand, and bearing interest at a rate of 5% per annum. Between January 30, 2015 and September 30, 2015, the 2015 Silverman Note was repaid in its entirety, and Mr. Silverman agreed to forgo receiving interest on the note. During the nine months ending September 30, 2015, the Company also received $21,100 of short-term advances from Mr. Silverman, which were repaid as of September 30, 2015.

 

As discussed in note 3, during the nine months ended September 30, 2015, four of the Company’s executive officers entered into agreements with the Company whereby certain amounts of accrued but unpaid compensation that each individual was entitled to receive would be paid in the form of Officer Notes, and the Company issued an aggregate of $913,519 of Officer Notes in satisfaction of the accrued liabilities. In addition, Mr. Geissler and Mr. Krawitz agreed to have their previously issued and outstanding demand notes due from the Company, in the principal amounts of $34,000 and $60,000, respectively, converted into separate Officer Notes. The Officer Notes bear interest at a rate of 5% per annum, with principal and interest due on March 1, 2016.

 

The Company has the option to prepay the Officer Notes, in whole or in part, and without premium or penalty, at any time upon 5 business days’ written notice to the holder. At any time after September 1, 2015, the holder of an Officer Note can convert all or part of the note into shares of the Company’s common stock at a conversion price equal to the average daily closing price of the Company’s common stock for the 10 days prior to conversion.

 

On April 16, 2014 and May 1, 2014, the Company issued promissory notes to Ned L. Siegel in the principal amount of $30,000 and $20,000, respectively (collectively, the “Siegel Notes”), with interest accruing at a rate of 9% per annum and with principal and interest due on these notes one year after their date of issuance. Mr. Siegel was appointed a director of the Company on June 17, 2014, and resigned from the Company’s board of directors on January 28, 2015. On February 27, 2015, the Siegel Notes were amended to (i) extend the maturity date to March 1, 2016, and (ii) reduce the per share conversion price from $350 to 60% of the average of the three lowest closing prices of the Company’s common stock for the 10 trading days prior to conversion.

 

During the nine months ending September 30, 2015, $37,924 of related party notes, along with $1,483 of accrued interest, were converted into 26,720 shares of common stock. As of September 30, 2015 there were $1,044,595 of related party notes outstanding. In addition, the Company received additional notices for the conversion of $3,300 related party notes that the Company was unable to honor.

 

Other Notes Payable

 

Other notes payable as of December 31, 2014 consisted of a note payable to PositiveID Corporation (“PSID”) in the principal amount of approximately $115,000 (the “PSID Note”) which is to be repaid through the issuance of a de minimus number of shares of the Company’s stock, and other promissory notes with an aggregate principal amount of $70,625 that are generally convertible into shares of the Company’s common stock at the option of the holder at a conversion price of $3,500,000 per share. For some of these notes, the Company may, at its sole option, elect to convert the note into common stock at a conversion price that is equal to 60% of the market price of the Company’s common stock, as defined in the notes. During the nine months ended September 30, 2015, $9,400 of these notes, plus $1,537 of accrued interest, was converted into 10 shares of the Company’s common stock.

 

At September 30, 2015, the total of all of the Company’s outstanding promissory notes were convertible into an aggregate of 117,380,460 shares of the Company’s common stock.

 

 12 

 

 

VERITEQ CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited)

September 30, 2015

 

During the nine months ended September 30, 2015 and 2014, the Company recognized interest expense of approximately $1.6 million and $2.1 million, respectively, which is primarily related to the amortization of debt discounts and, in 2015, recognition of additional principal due to the defaults on convertible notes.

  

5. SUBORDINATED DEBT REPORTED AT FAIR VALUE

 

In December 2012, VAC entered into an asset purchase agreement and 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 (the “SNC Note”). The SNC Note is convertible into one-third of the beneficial common stock ownership of VC held by Scott Silverman, or 33,333,333 shares of common stock as of September 30, 2015. The SNC Note was amended in July 2013 to extend the maturity date to June 30, 2015. The SNC Note has not been repaid.

 

The Company made an irrevocable election at the time of issuance to report the note at fair value, with changes in fair value recorded through the Company’s statement of operations as Other expense/income in each accounting period. At September 30, 2015 and December 31, 2014, the fair value of the SNC Note was $0.5 million and $0.3 million, respectively (see notes 6 and 12 for further information).

 

6. FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

 

Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities that are required to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as inherent risk, transfer restrictions and credit risk.

  

The Company applies the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

 

Level 1 – Quoted prices in active markets for identical assets or liabilities.

 

Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 – Inputs that are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.

 

As of September 30, 2015, the SNC Note (which the Company elected to be accounted for at fair value), the bifurcated embedded option in other convertible notes and the warrant liabilities were valued using Level 3 inputs. The changes in fair value of the SNC Note, the bifurcated embedded option in the convertible notes and the warrant liability during the three and nine months ended September 30, 2015 and 2014 are reflected in Changes in fair value of derivative and other fair valued instruments in the Company’s consolidated statement of operations. As of September 30, 2015, non-financial assets measured at fair value were the intangible asset value of $1.0 million, based on a level 1 input (see note 12).

 

 13 

 

 

VERITEQ CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited)

September 30, 2015

 

The following table summarizes the Company’s financial assets and liabilities measured at fair value as presented in the consolidated balance sheets as of September 30, 2015 and December 31, 2014 (in thousands):

 

   September 30, 2015   December 31, 2014 
   Level 1   Level 2   Level 3   Level 1   Level 2   Level 3 
                         
Liabilities:                        
SNC Note  $   $   $490   $   $   $316 
Bifurcated option in convertible notes  $   $   $6,246   $   $   $930 
Warrant liabilities  $   $   $2,086   $   $   $534 

 

The following is a summary of activity of Level 3 liabilities for the nine months ended September 30, 2015:

 

   SNC Note   Bifurcated embedded option in convertible notes   Warrant liabilities 
Balance at December 31, 2014  $316   $930   $534 
Issuance of additional debt        386      
Conversion of notes and exercise of warrants into shares of common stock        (168)   (11)
Losses (gains) included in net loss   174    5,098    1,563 
Balance at September 30, 2015  $490   $6,246   $2,086 

 

7. STOCKHOLDERS’ DEFICIT

 

Preferred Stock

 

As of September 30, 2015, the Company has authorized 5 million shares of preferred stock, par value $0.01 per share with 1,841 shares of Series D Convertible Preferred Stock (the “Series D Preferred Stock”) outstanding, of which 1,400 shares are held by Scott Silverman and 441 shares are held by Randolph Geissler. The stated value of the Series D Preferred Stock is reflected as temporary equity in the Company’s consolidated balance sheet, due to the possibility that under certain conditions the Series D Preferred Stock could be required to be settled in cash. On March 13, 2015, the Company’s Board of Directors approved an amendment to the Certificate of Designation for the Series D Preferred Stock to change the price for which the Series D Preferred Stock can be converted into common stock of the Company to the average closing price of the common stock over any 5 consecutive Trading Days occurring between March 12, 2015 and the conversion date, with the five-day period being elected by the holder of the Series D Preferred Stock in the conversion notice.

 

Common Stock

 

As previously discussed in note 1, the February 2015 Reverse Stock Split became effective on February 11, 2015, and the July 2015 Reverse Stock Split became effective on July 29, 2015. All share, per share and capital stock amounts have been retroactively restated as of September 30, 2015 and December 31, 2014, and for the three and nine months ended September 30, 2015 and 2014 to give effect to the reverse stock splits.

 

On April 20, 2015, the Company sold 526 shares of its common stock to a director of the Company for a purchase price of $10,000. The purchase price was based on the closing price of the Company’s common stock on April 19, 2015.

 

On April 22, 2015, the Company sold 666 shares of its common stock to Mr. Silverman for $10,000. The purchase price was based on the closing price of the Company’s common stock on April 21, 2015.

 

On May 12, 2015, a director of the Company converted outstanding amounts owed to him in the amount of $32,101, into 10,700 shares of common stock. The number of shares issued was based on the closing price of the Company’s common stock on May 11, 2015.

 

 14 

 

 

VERITEQ CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited)

September 30, 2015

 

On August 13, 2015, the Compensation Committee of the Company’s Board of Directors (the “Compensation Committee”) granted 100,000,000 shares of restricted common stock to executive officers of the Company and options to purchase 148,500,000 shares of the Company’s common stock to employees and directors of the Company. These grants were under the Company’s 2014 Stock Incentive Plan and vested on the date of grant. Also on August 13, 2015, the Compensation Committee granted an additional 150,000,000 shares of restricted common stock to certain executive officers and a director. The restricted common stock vests on January 2, 2017 or upon a change of control.

 

The stock options granted were valued at the date of grant using the Black-Scholes valuation model, with the following assumptions: risk-free interest rate of 2.19%, dividend yield of 0% and volatility of 694.91%. For the three and nine months ended September 30, 2015, the Company recorded compensation expense of $5.3 million with respect to the stock options. The grant date fair value of the restricted common stock is being expensed over the vesting period, and the Company recorded $0.9 million in stock-based compensation in the three and nine months ending September 30, 2015.

 

As of September 30, 2015, the Company had 100 billion shares of common stock authorized and 250,723,718 shares were issued and outstanding, including the 250 million shares of restricted common stock issued to certain of the Company’s officers and directors. 

 

Warrants Treated as Liabilities

 

On November 13, 2013 in connection with the issuance of senior convertible notes and an amendment to certain agreements between the Company and PSID, the Company issued warrants to purchase up to 2,944,444 shares of the Company’s common stock on a pre-split basis (the “November 2013 Warrants”). The November 2013 Warrants became exercisable at issuance and entitle the Investors to purchase shares of the Company’s common stock for a period of five years at an initial exercise price (prior to giving effect to the reverse split) of $2.84 per share, contain a cashless exercise provision and a full ratchet price protection provision on the exercise price. As of September 30, 2015, after consideration of both reverse stock splits and based on the aggregate exercise price of $2,821,580, if all of the remaining November 2013 Warrants had been exercised the number of shares of the Company’s common stock that would have been issued would have been 67,180,477 shares based on an exercise price of $0.042 per share, subject to adjustment for the cashless exercise provisions. During the nine months ended September 30, 2015, the Company issued 223,817 shares of common stock for November 2013 Warrants exercised on a cashless basis and approximately $11,000 of warrant liabilities were reclassified to additional paid in capital.

 

During the nine months ended September 30, 2015, the Company issued the March 2015 Warrant (see note 4). The March 2015 Warrant is exercisable at any time until three years after the date of issuance. The terms of the warrant provides for a proportional downward adjustment of the exercise price in the event that the Company issues or sells, or is deemed to have issued or sold, shares of common stock at an issuance price that is less than the market price of the common stock at the time of issuance, as defined in the warrant agreement. The Company determined that the fair value of the March 2015 Warrant was de minimus at the time of issuance and at September 30, 2015.

 

The terms of the March 2015 Warrant and the November 2013 Warrants are such that they do not qualify for equity treatment under ASC 815 and are classified as liabilities at September 30, 2015 and December 31, 2014. The carrying amount of the warrant liabilities approximate management’s estimate of their fair value (see note 6) and were determined to be $2.1 million and $0.5 million at September 30, 2015 and December 31, 2014, respectively. The Company recognized a loss on the change in fair value of the Company’s warrant liabilities for the three months ended September 30, 2015 of $24,000 and a gain of $1.5 million for the three months ended September 30, 2014. The Company recognized a loss on the change in fair value of the warrant liabilities of $1.6 million and $1.3 million for the nine months ended September 30, 2015 and 2014, respectively.

 

8. INCOME TAXES

 

The Company did not record an income tax provision or benefit for the three and nine months ended September 30, 2015 and 2014. The Company has incurred losses since its inception and has provided a valuation allowance against its net operating loss carryforwards and other net deferred tax assets.

   

 15 

 

 

VERITEQ CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited)

September 30, 2015

 

9. RELATED PARTY TRANSACTIONS 

 

See notes 3, 4 and 7 for disclosures regarding transactions with related parties.

 

10. COMMITMENTS AND CONTINGENCIES 

 

In March 2013, VC appointed a liquidator and initiated the formal liquidation of its U.K. subsidiary, Signature Industries Limited (“Signature”), primarily related to its outstanding liabilities. VC used £40,000 (approximately $61,000) of the proceeds from the sale of Signature’s former division, Digital Angel Radio Communications Limited (“DARC”) to satisfy its estimated portion of Signature’s outstanding liabilities. However, additional claims submitted to the liquidator could result in the Company being required to pay additional amounts to cover its share of Signature’s outstanding liabilities. The Company has estimated a potential additional liability of approximately $159,000 which is reflected in accrued expenses in the accompanying consolidated balance sheets as of September 30, 2015 and December 31, 2014.

 

On January 30, 2014, the Company and the buyers of DARC entered into a letter agreement under which the Company agreed to accept a payment of £62,000 (USD approximately $0.1 million) in full and final settlement of a deferred purchase price related to VC’s sale of DARC in March 2013. As a result, the Company recorded a loss on the settlement of this receivable of approximately USD $55,000 in the nine months ended September 30, 2014, which is reflected in Other expenses in the Company’s consolidated statement of operations. All of the other provisions (including, without limitation, the indemnities) agreed between VC, and/or the Buyers under the stock purchase agreement and any related documents remain in full force and effect.

 

During the year ended December 31, 2013, the Company was informed by the New Jersey Department of Environmental Protection that a predecessor business sold a building in 2006 for which an environmental action has been claimed. The claim is being reviewed by the Company’s outside legal counsel, and the Company has not yet determined the impact on its financial condition, liquidity or cash flows, if any.

   

11. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION 

 

Supplemental cash flow information for the nine months ended September 30, 2015 and 2014 were as follows (in thousands):

 

   2015   2014 
Supplemental disclosure of cash flow information:        
Cash paid for interest   -    - 
Cash paid for income taxes   -    - 
Supplemental schedule of non-cash investing and financing activities:          
Notes payable and accrued liabilities converted into common stock   690    625 
Accrued liabilities satisfied through the issuance of convertible promissory notes to related parties   914    - 
Issuance of a warrant in connection with a promissory note   -    66 
Cashless exercises of common stock warrants   11    7,048 
Reclassification of derivative liability to equity upon conversion of notes payable   168    - 
Discounts recorded for embedded conversion option liabilities of convertible notes   386    - 

  

12. SUBSEQUENT EVENTS 

 

Issuance of Convertible Notes

 

Between October 1, 2015 and March 11, 2016, the Company issued convertible promissory notes in the aggregate principal amount of $358,002, for which the Company received $305,898 in net proceeds. In addition, the Company issued convertible promissory notes in connection with the proposed acquisition and other transactions discussed below in the aggregate principal amount of $341,176. The Company received no cash proceeds with the issuance of these notes. These notes are due one year after the date of issuance, bear interest at rates of 12% per annum, and are convertible into shares of common stock at the lesser of (i) $0.015 per share or (ii) 60% of the average of the three lowest trading prices of the Company’s common stock during the 10 days prior to conversion.

 

 16 

 

 

VERITEQ CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited)

September 30, 2015

 

The foregoing notes contain terms similar to those of the convertible notes issued in November 2013 and in 2014, whereby in the event the Company were to issue or sell, or is deemed to have issued or sold, any shares of common stock for a consideration per share (the “New Issuance Price”) that is less than the conversion price in effect immediately prior to such issue or sale or deemed issuance or sale (a “Dilutive Issuance”), then, immediately after such Dilutive Issuance, the conversion price then in effect is reduced to an amount equal to the New Issuance Price.

 

In November and December of 2015 the Company issued additional Officer Notes in the aggregate principal amount of $96,955 in settlement of accrued but unpaid compensation. The terms and conditions of these notes are substantially identical to those of the Officer Notes described in note 4.

 

Defaults on Senior and Subordinated Securities

 

The Company’s failure to timely file its Quarterly Report on Form 10-Q with the SEC in August of 2015, as well as its failure to pay some of the convertible notes that became due, constitute events of default on the Company’s outstanding convertible promissory notes, including approximately $1.0 million of senior secured promissory notes secured by substantially all of the Company’s assets (the "Senior Notes”). As a result, the Company entered into discussions with Magna Equities I, LLC, (together with its affiliate, Magna Equities II, “Magna”) the collateral agent for the holders of the Senior Notes, and agreed to the actions taken below.

 

On October 19, 2015, the Company entered into a letter agreement with Magna pursuant to which the Company agreed to exchange approximately $1.3 million aggregate principal amount of outstanding unsecured convertible promissory notes held by Magna for an equal principal amount of new secured convertible promissory notes (the “New Magna Notes”) intended to be pari passu in rank and priority with the Senior Notes. There was no accounting effect to this amendment.

 

On October 19, 2015, the Company received a default notice from Magna, acting in its capacity as collateral agent under the security agreement pertaining to the Senior Notes. At the time of the notice, Magna was the holder of outstanding convertible promissory notes of the Company in the aggregate principal amount of approximately $1.6 million (excluding all accrued but unpaid interest), consisting of approximately $0.3 million of Senior Notes and $1.3 million of New Magna Notes, and had entered into agreements with holders of an additional $500,000 aggregate principal of Senior Notes to acquire such Senior Notes. The default notice demanded repayment of the entire amount due under the Senior Notes (including the $500,000 of Senior Notes Magna had the right to acquire) and the New Magna Notes (collectively, the "Magna Notes"). The Company did not have the financial resources to repay this indebtedness. The default notice also advised the Company and its subsidiaries that Magna was exercising all of its rights and remedies under the Senior Notes it owns (including the $500,000 of Senior Notes Magna had the right to acquire) and the New Magna Notes and the related debt documents. In conjunction with this default notice, the Company received from Magna a Notification of Disposition of Collateral (the “NDC”). The NDC advised the Company that Magna intended to sell, lease or license the assets securing the Senior Notes and the New Magna Notes at a public auction to take place in early November of 2015. These assets constitute substantially all of the assets of the Company and its subsidiaries, except for those assets securing the SNC Note. On November 4, 2015, the public auction took place, and Magna purchased the assets, including the capital stock of the Company’s VAC and PositiveID Animal Health subsidiaries, for $1 million, which was credited against the Company’s outstanding indebtedness to Magna.

 

Magna’s purchase of the $500,000 of Senior Notes from the previous holders was completed on November 10, 2015. In connection with this transaction, the Company amended a previously issued unsecured convertible promissory note with one of the holders by increasing the principal amount of the note by $102,500. The Company did not receive any cash proceeds from this transaction.

 

 17 

 

 

VERITEQ CORPORATION AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (unaudited)

September 30, 2015

 

SNC Assets

 

The SNC Note (see note 5) is secured by all of the assets, consisting primarily of intellectual property and certain tangible property and equipment (the “SNC Collateral”), acquired by the Company under the asset purchase agreement entered into by the Company and SNC Holdings Corp. on November 30, 2012. Under the terms of the SNC Note, as amended, which was due on June 30, 2015 and has not been repaid, the holder of the SNC Note may look solely to the SNC Collateral to satisfy all obligations of the Company to it under the SNC Note and not to any other assets of the Company and/or its subsidiaries. In October of 2015, the Company contacted the holder of the SNC Note regarding the return of the SNC Collateral to the holder in satisfaction of the SNC Note. By letter agreement dated February 18, 2016, the Company agreed to return the SNC Collateral to the holder of the SNC Note, and the holder agreed to discharge the Company of all of its obligations and liabilities under the SNC Note upon receipt of the SNC Collateral.

 

Proposed Acquisition

 

On November 25, 2015, the Company entered into a Stock Purchase Agreement (the “Purchase Agreement”) with The Brace Shop, LLC, a Florida limited liability company (“The Brace Shop”) and Lynne Shapiro (the “Seller”), whereby the Company agreed to acquire (the “Acquisition”), all of the issued and outstanding membership interests (the “Stock”) of The Brace Shop. The Brace Shop operates as an online retailer of orthopedic braces and related medical devices and, according to The Brace Shop’s management, had annual unaudited revenues of approximately $7 million for the year ended December 31, 2015.

 

Pursuant to the terms of the Purchase Agreement, the aggregate purchase price for the Stock is (i) $250,000 in cash, $125,000 of which was paid to the Seller upon the execution of the Purchase Agreement, $62,500 of which was paid to the Seller on January 6, 2016 and the remaining $62,500 was paid to the Seller on February 5, 2016, (ii) one unit of the Company’s to be established Series E Preferred Stock which is convertible into 84.9% of the issued and outstanding shares of common stock of the Company, on a fully diluted basis with voting rights, (iii) a goldenshare in the form of a warrant (the “Goldenshare”), exercisable for that number of shares of common stock required to insure that the Series E Preferred Stock issued as part of the purchase price to the Seller is convertible into 84.9% of the issued and outstanding shares of common stock, on a fully diluted basis. At the closing of the Acquisition, the Company’s current Chief Executive Officer will receive a unit of the Series E Preferred Stock convertible into 3.9% of the issued and outstanding common stock of the Company on a fully-diluted basis. The units of Series E Preferred Stock and the Goldenshare will not be convertible until the date six months from the date of the closing of the Acquisition. In addition, upon the closing of the Acquisition, pursuant to the Purchase Agreement, the Company will pay a consultant $50,000 (less $10,000 that was paid upon the execution of the Purchase Agreement), and issue the consultant a 3 year warrant to purchase, at an exercise price of $0.01 per share, 2.99% of the issued and outstanding common stock of the Company, which warrant may be exercisable on a cashless basis.

 

The aggregate cash payment of $250,000 to the Seller was financed by the sale of senior secured convertible promissory notes in the aggregate principal amount of $294,118 (the “Acquisition Notes”) to an institutional investor who previously purchased convertible debt from the Company (the “Investor”). The Acquisition Notes bear interest at a rate of 12% per annum, with principal and interest due one year from the date of issuance. The Acquisition Notes are convertible into shares of the Company’s Common Stock at a conversion price equal to the lesser of (i) $0.015 per share or (ii) 60% of the average of the three lowest trading prices during the ten trading days prior to conversion, and contain full-ratchet anti-dilution provisions similar to those of convertible notes previously issued by the Company. The embedded conversion option contained in the Acquisition Notes will be bifurcated and reflected as a derivative liability at fair value. The Company currently anticipates that the $50,000 consulting fee and all other costs and expenses related to the Acquisition and the Company’s ongoing operations will be funded through the sale of additional senior secured convertible promissory notes to the Investor on terms substantially identical to that of the Acquisition Notes.

 

The Purchase Agreement contemplates that all interest, principal and any other required payments on all debt instruments of the Company that are outstanding as of the date of the Purchase Agreement (but excluding the Acquisition Notes) shall only be paid through the issuance of shares of common stock. All options, warrants, shares of preferred stock and other securities of the Company outstanding as of the date of the Purchase Agreement are to remain in place on the terms set forth in each of such securities, except that all options, warrants and shares of preferred stock are to be converted into common stock within six months of the date of closing of the Acquisition or cancelled.

 

The closing of the Acquisition is subject to a number of other conditions including, but not limited to, the Company becoming current in its reporting requirements under the Federal Securities Laws, and completion of an audit of The Brace Shop’s financial statements for its two most recent fiscal years. Since the sole member of The Brace Shop would obtain voting control of 84.9% of the Company, the Company anticipates that the closing of the Acquisition, if it takes place, will result in a change in control, and therefore would be accounted for as a reverse acquisition and recapitalization with the Brace Shop as the accounting acquirer and continuing business of the Company.

 

While the Company currently believes that the closing of the Acquisition will take place in March of 2016, there can be no assurances that the Closing will occur during such time or at all, or that the terms of the Acquisition as set forth in the Purchase Agreement will not materially change. Moreover, the Company currently has limited funds and no assurances can be given that it will be able to raise any additional funds on terms acceptable to the Company, or at all, or that the Company will be able to continue as a going concern. The failure to do so could result in the Company not being able to effectuate the Acquisition

 

 18 

 

 

VERITEQ CORPORATION AND SUBSIDIARIES

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion should be read in conjunction with the information contained in our unaudited consolidated financial statements and notes thereto appearing elsewhere herein, and in conjunction with the Management’s Discussion and Analysis set forth in our fiscal 2014 Annual Report on Form 10-K. 

  

OVERVIEW

 

Our Business

 

We were previously engaged in the business of radio frequency identification technologies (“RFID”) for the Unique Device Identification (“UDI”) of implantable medical devices and, subject to funds becoming available, radiation dose measurement technologies for use in radiation therapy treatment. From inception through September 30, 2015, we generated minimal sales revenue and our operations were subject to all the risks inherent in the establishment of a new business enterprise. Our failure to timely file our Quarterly Report on Form 10-Q with the SEC in August of 2015, as well as our failure to pay certain indebtedness that became due, constituted events of default on our outstanding convertible promissory notes, including approximately $1.0 million of senior secured promissory notes secured by substantially all of our assets, comprised primarily of intellectual property related to UDI of implantable medical devices, and $1.3 of million convertible promissory of notes that were pari passu in rank and priority to the senior secured promissory notes (collectively, the "Senior Notes”).

 

On October 19, 2015, we received a default notice from the collateral agent under the security agreement pertaining to the Senior Notes. The default notice demanded repayment of the entire amount due under the Senior Notes, and we did not have the financial resources to repay this indebtedness. We also received a Notification of Disposition of Collateral (the “NDC”). The NDC advised the Company that the collateral agent intended to sell, lease or license the assets securing the Senior Notes at a public auction to take place in early November of 2015. These assets comprised substantially all of the assets of the Company and its subsidiaries, except for the assets described below. On November 4, 2015, the public auction took place, and the holder of a substantial portion of the Senior Notes purchased the assets, including the capital stock of our VeriTeQ Acquisition Corp. and PositiveID Animal Health subsidiaries, for $1 million, which was credited against the Company’s outstanding indebtedness to the holder of the Senior Notes.

 

In October of 2015, we contacted the holder of a subordinated convertible promissory note (the “SNC Note”) regarding the possibility of returning the assets securing the SNC Note, consisting primarily of intellectual property and certain tangible property and equipment related to radiation dose measurement technologies (the “SNC Collateral”), to the holder in satisfaction of the SNC Note. By letter agreement dated February 18, 2016, we agreed to return the SNC Collateral to the holder of the SNC Note, and the holder agreed to discharge the Company of all of its obligations and liabilities under the SNC Note upon receipt of the SNC Collateral.

 

Although we still have a substantial amount of outstanding indebtedness in the form of senior and subordinated convertible notes, we currently intend to attempt to acquire, merge or combine with and/or acquire operating assets of an operating business. On November 24, 2015, as more fully described in note 12 to the accompanying consolidated financial statements, we entered into a Stock Purchase Agreement with The Brace Shop, LLC, a Florida limited liability company (“The Brace Shop”) and Lynne Shapiro (the “Seller”), whereby we agreed to acquire (the “Acquisition”), all of the issued and outstanding membership interests of The Brace Shop. The Brace Shop operates as an online retailer of orthopedic braces and related medical devices and, according to The Brace Shop’s management, had annual unaudited revenues of approximately $7 million for the year ended December 31, 2015.

 

The closing of the Acquisition is subject to a number of conditions including, but not limited to, our becoming current in our reporting requirements under the Federal Securities Laws, and completion of an audit of The Brace Shop’s financial statements for its two most recent fiscal years. While we currently believe that the closing of the Acquisition will take place in March of 2016, there can be no assurances that the closing will occur during such time or at all. Moreover, we currently have limited funds and no assurances can be given that we will be able to raise any additional funds on terms acceptable to us, or at all, or that we will be able to continue as a going concern.

 

 19 

 

 

VERITEQ CORPORATION AND SUBSIDIARIES

 

Reverse Stock Splits

 

On February 11, 2015, an amendment to our Amended and Restated Certificate of Incorporation became effective to implement a 1-for-1,000 reverse split (the “February 2015 Reverse Stock Split”) of our outstanding common stock, whereby each 1,000 shares of the Company’s issued and outstanding common stock was automatically, and without any action on the part of the respective holders, combined and converted into one issued and outstanding share of common stock. On July 29, 2015, another amendment to our Amended and Restated Certificate of Incorporation became effective to implement a 1-for-10,000 reverse stock split (the “July 2015 Reverse Stock Split” and, together with the February 2015 Reverse Stock Split, the “2015 Reverse Stock Splits”) of the Company’s common stock. As a result, each 10,000 shares of the Company’s issued and outstanding common stock automatically, and without any action on the part of the respective holders, were combined and converted into one issued and outstanding share of common stock. The 2015 Reverse Stock Splits affected all issued and outstanding shares of our common stock, as well as all common stock underlying stock options, warrants, convertible notes and convertible preferred stock outstanding immediately prior to the 2015 Reverse Stock Splits. The February 2015 Reverse Stock Split was authorized by our Board of Directors, and by our Stockholders at the 2014 Annual Meeting of Stockholders held on December 18, 2014. The July amendment to our Amended and Restated Certificate of Incorporation also increased the number of common shares that we are authorized to issue from 10 billion to 100 billion and, along with the July 2015 Reverse Stock Split, was approved by our Board of Directors and ratified by our stockholders on May 26, 2015.

 

No fractional shares were issued as a result of the 2015 Reverse Stock Splits and stockholders who otherwise would have been entitled to a fractional share received or will receive, in lieu thereof, a cash payment equal to the value of the fractional share to which the stockholder would otherwise be entitled based on the per share closing sales price of the Company’s common stock on the effective date of the 2015 Reverse Stock Splits. All share, per share and capital stock amounts as of September 30, 2015, December 31, 2014 and for the three and nine months ended September 30, 2015 and 2014 have been restated to give effect to the 2015 Reverse Stock Splits.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

Our discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent liabilities. We base these estimates on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances, and these estimates form the basis for our judgments concerning the carrying values of assets and liabilities that are not readily apparent from other sources. We periodically evaluate these estimates and judgments based on available information and experience. Actual results could differ from our estimates under different assumptions and conditions. If actual results significantly differ from our estimates, our financial condition and results of operations could be materially impacted.

 

We have identified the policies and significant estimation processes discussed below as critical to our business operations and to the understanding of our results of operations. For a detailed discussion on the application of these and other accounting policies, see Note 2 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2014.

 

Use of Estimates  

 

The preparation of financial statements in conformity with U.S. GAAP 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 and valuation of long-lived assets; (ii) valuation models used in determining the value of certain derivative financial instruments, warrant liabilities and the fair value of a promissory note with an embedded conversion option; (iii) determining valuation allowances for deferred tax assets and (iv) stock-based compensation.

 

 20 

 

 

VERITEQ CORPORATION AND SUBSIDIARIES

 

Derivative Financial Instruments and Fair Value

 

We account for notes payable that are convertible into shares of the Company’s common stock and warrants issued in conjunction with the issuance of such notes in accordance with the guidance contained in the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 815, Derivatives and Hedging (“ASC 815”) and ASC Topic 480, Distinguishing Liabilities From Equity (“ASC 480”). For warrant instruments and conversion options embedded in promissory notes that are not deemed to be indexed to the Company’s own stock, we classify such instruments as liabilities at their fair values at the time of issuance and adjust the instruments to fair value at each reporting period. These liabilities, as well as a convertible note that we elected to account for at fair value, are subject to re-measurement at each balance sheet date until extinguished either through conversion or exercise, and any change in fair value is recognized in our statement of operations. The fair values of these derivative and other financial instruments have been estimated using Monte Carlo simulations and other valuation techniques.

 

Revenue Recognition 

 

We recognize revenue at the time product is shipped and title has transferred, provided that a purchase order has been received or a contract has been executed, there are no uncertainties regarding customer acceptance, the sales price is fixed and determinable and collectability is deemed probable. 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.

 

Income Taxes 

 

We have adopted Accounting Standards Codification subtopic 740-10, Income Taxes, (“ASC 740-10”), which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in our financial statements. Under this method, deferred tax liabilities and assets are determined for temporary differences between the financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts, based on enacted tax laws and rates in effect for the year in which the differences are expected to affect taxable income. 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 when we determine that it is more likely than not that we will fail to generate sufficient taxable income to be able to utilize the deferred tax assets.

  

RESULTS OF OPERATIONS

 

Three Months Ended September 30, 2015 Compared to Three Months Ended September 30, 2014

 

Revenue and Gross Profit

 

Revenues for the three months ended September 30, 2015, our fiscal third quarter, were $4,000, as compared to $44,000 for the three months ended September 30, 2014. The decrease is due to EL accepting a high volume order at a one-time price discount in the second quarter of 2015 to assist with our liquidity difficulties, resulting in reduced sales in the third quarter of 2015. Gross profit for the three months ended September 30, 2015 was nil, as compared to $33,000 for the same period of a year ago.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses, including development expenses, (“SG&A”) were approximately $7.0 million for the three months ended September 30, 2015, as compared to $1.5 million for the three months ended September 30, 2014. The increase is mainly due to $6.2 million of stock-based compensation expense in 2015, as compared to $0.2 million in 2014. During the three months ended September 30, 2015, we granted 250,000,000 shares of restricted common stock to certain of our officers and directors which vest on January 2, 2017 or upon a change in control, and we granted options to purchase 148,500,000 shares of common stock to employees which vested on the date of grant.

 

Depreciation and Amortization Expense

 

We incurred depreciation and amortization expense of $29,000 and $150,000 for the three months ended September 30, 2015 and 2014, respectively. The decrease is due to lower amortization expense related to intangible assets, as we recognized an impairment and lowered the carrying value of our intangible assets by $5.0 million in the fourth quarter of 2014.

  

 21 

 

 

VERITEQ CORPORATION AND SUBSIDIARIES

 

Operating Loss

 

Our operating loss was $7.0 million and $1.7 million for the three months ended September 30, 2015 and 2014, respectively. The increased operating loss was due to the increase in stock-based compensation expense.

 

Interest Expense

 

Interest expense was $0.9 million and $0.5 million for the three months ended September 30, 2015 and 2014, respectively. During the three months ended September 30, 2015, we recorded a non-cash interest charge of approximately $0.5 million due to increases in the principal amount of our outstanding convertible notes resulting from the events of default that took place during the quarter, in accordance with the terms of the notes. The remainder of our interest expense in both periods is primarily comprised of the amortization of debt discounts. The discounts on our debt are largely the result of the initial fair value recognized for the embedded conversion options contained in the convertible promissory notes we issue to fund our operations and, to a lesser extent, original issue discount on these notes, which result in a reduction of net proceeds to us.

 

Change in Value of Derivative and other Fair Valued Instruments

 

During the three months ended September 30, 2015, we recognized a loss on the change in fair value of derivative and other fair valued instruments of $4.2 million, due to increases in the fair value of the SNC Note, conversion options embedded in convertible notes and warrant liabilities in the amounts of $0.2 million, $4.0 million and $24,000, respectively. For the three months ended September 30, 2014, we recorded losses related to changes in the fair value of the SNC Note and conversion options embedded in convertible notes in the amount of $0.1 million and $0.2 million, respectively, and a gain on the change in fair value of warrant liabilities in the amount of $1.5 million.

 

We believe that the embedded conversion options within outstanding notes payable, the SNC Note and the outstanding warrant liabilities could continue to result in significant fluctuations to our results of operations, as these instruments, or securities with similar terms that we may issue in the future, require a determination of fair value in each reporting period, and changes in these fair values are required to be recognized through our statement of operations.

 

Net Loss 

 

Our net loss was $12.1 million for the three months ended September 30, 2015, as compared to $0.9 million for the three months ended September 30, 2014. The difference is mainly due to the increase in stock-based compensation in 2015, and the net loss on the change in fair value of derivative and other fair valued instruments of $4.2 million in 2015, as compared to a net gain of $1.3 million in 2014.

 

Nine Months Ended September 30, 2015 Compared to Nine Months Ended September 30, 2014

 

Revenue and Gross Profit

 

Revenues for the nine months ended September 30, 2015 were $0.3 million, as compared to $0.1 million for the nine months ended September 30, 2014. The increase is due to an increase in the number of microtransponder units shipped to EL as a result of increased sales by EL of breast implants containing our microtransponders.

 

Gross profit for the nine months ended September 30, 2015 was $163,000, as compared to $82,000 for the same period of a year ago. Our gross margin for the first nine months of 2015 was 56.8%, as compared with 59.0% for the first nine months of 2014. The decrease was due to the one-time volume discount provided to EL in the second quarter of 2015.

 

Selling, General and Administrative Expenses

 

SG&A was approximately $8.9 million for the nine months ended September 30, 2015, as compared to $4.1 million for the nine months ended September 30, 2014. The increase is mainly due to a $5.7 million increase in stock-based compensation in 2015 due to the stock option and restricted common stock grants in August of 2015, partially offset by and a $0.7 million decrease in legal, consulting and professional fees, including investor relations expenses.

 

 22 

 

 

VERITEQ CORPORATION AND SUBSIDIARIES

 

Asset Impairment Charge

 

At June 30, 2015, we determined that the carrying value of the intangible assets related to our RFID technology exceeded their fair value. As a result, we recorded an impairment charge of $0.4 million in the nine months ended September 30, 2015 to write these assets down to their fair value, with no comparable amount for the nine months ended September 30, 2014.

 

Depreciation and Amortization Expense

 

We incurred depreciation and amortization expense of $0.1 million and $0.4 million for the first nine months of 2015 and 2014, respectively. The decrease is due to lower amortization expense related to intangible assets due to the impairment charge and corresponding reduction in carrying value of our intangible assets recognized in the fourth quarter of 2014.

 

Operating Loss

 

Our operating loss was $9.3 million and $4.5 million for the nine months ended September 30, 2015 and 2014, respectively. The increased operating loss was mainly due to the increase in SG&A.

 

Interest Expense

 

Interest expense was $1.6 million and $2.1 million for the first nine months of 2015 and 2014, respectively. Most of our interest expense in both periods is due to the amortization of debt discounts.

 

Change in Value of Derivative and other Fair Valued Instruments

 

During the nine months ended September 30, 2015, we recognized a loss on the change in fair value of derivative and other fair valued instruments of $6.8 million, mainly due to an increase in the fair values of conversion options embedded in convertible notes and warrant liabilities. For the nine months ended September 30, 2014, we recorded gains related to changes in the fair value of the SNC Note and conversion options embedded in convertible notes in the amount of $2.7 million and $3.4 million, respectively, partially offset by a loss on the change in fair value of warrant liabilities in the amount of $1.3 million.

 

Other Income/Expense

 

Other expense was $0.1 million for the nine months ended September 30, 2014, due to a loss recognized on the settlement of the receivable from the sale of a former subsidiary, with no comparable amount during the nine months ended September 30, 2015.   

 

Net Loss 

 

Our net loss was $17.7 million for the nine months ended September 30, 2015, as compared to $1.8 million for the nine months ended September 30, 2014. The difference is mainly due to the net gain on the change in fair value of derivative and other fair valued instruments of $4.8 million in 2014, as compared to a loss of $6.8 million in 2015, and to the increase in stock-based compensation expense in 2015.

  

LIQUIDITY AND CAPITAL RESOURCES

 

We have incurred significant operating losses and have not generated significant revenues since our inception. At September 30, 2015 we had a working capital deficit of $16.0 million and a nominal cash balance. Our cash position is critically deficient, and certain payments essential to our ability to operate are not being made in the ordinary course of business, or at all. Failure to raise capital in the coming days to fund our operations will have a material adverse effect on our financial condition, raising substantial doubt about our ability to continue as a going concern. We currently do not have sufficient cash or other financial resources to fund our operations and meet our obligations, including approximately $8.3 million of total indebtedness that is or will become due, for the next twelve months. While we anticipate that a substantial portion of this indebtedness will be converted into shares of our common stock or satisfied through the return of certain assets, there can be no assurances that we will not receive demands for cash payments on this indebtedness.

 

 23 

 

 

VERITEQ CORPORATION AND SUBSIDIARIES

 

Since November of 2013, we have financed our operations primarily through the issuance of convertible promissory notes (“Convertible Notes”). The outstanding principal amount of Convertible Notes as of September 30, 2015 was approximately $5.0 million. We issued additional Convertible Notes in the aggregate principal amount of approximately $0.4 million between October 1, 2015 and March 11, 2016, for which we received $0.3 million in net proceeds. The Convertible Notes generally mature within 9 to 12 months from the date of issuance and bear interest at rates ranging from 8% to 12% per annum with all interest payable at maturity. Outstanding principal and accrued interest is convertible into shares of Common Stock at discounts to the market price of the Company’s Common Stock ranging from 39% to 43%, with the market price being based on the low end of the trading range of the Common Stock during the 10 to 30 days prior to conversion, depending on the specific note being converted. In addition, substantially all of the Convertible Notes contain provisions whereby in the event the Company were to issue or sell, or is deemed to have issued or sold, any shares of Common Stock for a consideration per share (the “New Issuance Price”) that is less than the conversion price in effect immediately prior to such issue or sale or deemed issuance or sale (a “Dilutive Issuance”), then, immediately after such Dilutive Issuance, the conversion price then in effect is reduced to an amount equal to the New Issuance Price.

 

As of September 30, 2015, we were in payment default on existing indebtedness in the approximate amount of $0.5 million. Our failure to timely file our Quarterly Report on Form 10-Q with the SEC in August of 2015, as well as our failure to pay some of the convertible notes that became due, constitute events of default on our Convertible Notes, including approximately $2.3 million of Senior Notes. As a result, we entered into discussions with Magna Equities I, LLC, (together with its affiliate, Magna Equities II, “Magna”) the collateral agent for the holders of the Senior Notes, and agreed to the actions taken below.

 

On October 19, 2015, we received a default notice from Magna, acting in its capacity as collateral agent under the security agreement pertaining to the Senior Notes. At the time of the notice, Magna was the holder of outstanding convertible promissory notes of the Company in the aggregate principal amount of approximately $1.6 million (excluding all accrued but unpaid interest) of Senior Notes, and had entered into agreements with holders of an additional $0.5 million aggregate principal of Senior Notes to acquire such Senior Notes. The default notice demanded repayment of the entire amount due under the Senior Notes (including the $0.5 million of Senior Notes Magna had the right to acquire, collectively, the "Magna Notes"). We did not have the financial resources to repay this indebtedness. The default notice also advised the Company and its subsidiaries that Magna was exercising all of its rights and remedies under the Magna Notes and the related debt documents. In conjunction with this default notice, we received from Magna a Notification of Disposition of Collateral (the “NDC”). The NDC advised us that Magna intended to sell, lease or license the assets securing the Senior Notes at a public auction to take place in early November of 2015. These assets constitute substantially all of our assets, except for those assets securing the SNC Note. On November 4, 2015, the public auction took place, and Magna purchased the assets, including the capital stock of our VAC and PositiveID Animal Health subsidiaries, for $1 million, which was credited against our outstanding indebtedness to Magna.

 

We may continue to receive limited funding in the form of additional Convertible Notes while we attempt to acquire, merge or combine with and/or acquire operating assets of an operating business, however we have no commitments for any additional funding and currently have minimal cash balances. No assurances can be given that we will be able to complete an acquisition or merger transaction, raise any additional funds on terms acceptable to us, or at all, or that we will be able to continue as a going concern.

 

In December 2012, we entered into an asset purchase agreement and 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, we issued the SNC Note in the principal amount of $3.3 million. The SNC Note was amended in July 2013 to extend the maturity date to June 30, 2015. The SNC Note has not been repaid. By letter agreement dated February 18, 2016, we agreed to return the SNC Collateral to the holder of the SNC Note, and the holder agreed to discharge the Company of all of its obligations and liabilities under the SNC Note upon receipt of the SNC Collateral.

 

 24 

 

 

VERITEQ CORPORATION AND SUBSIDIARIES

 

A summary of our cash flows for the periods indicated is as follows:

 

(in thousands)  Nine Months Ended September 30, 
   2015   2014 
Cash used in operating activities  $(982)  $(1,938)
Cash used in investing activities   (1)   (20)
Cash provided by financing activities   909    1,969 
(Decrease) increase in cash and cash equivalents   (74)   11 
Cash and cash equivalents, beginning of period   77    13 
Cash and cash equivalents, end of year of period  $3   $24 

 

Cash used in operating activities was $1.0 million and $1.9 million for the nine months ended September 30, 2015 and 2014, respectively. The following table illustrates the primary components of our cash flows from operations:

 

(in thousands)  Nine Months Ended June 30, 
   2015   2014 
Net loss  $(17,705)  $(1,826)
Non-cash expenses, (gains) and losses   14,880    (1,426)
Accounts payable and accrued expenses   1,804    1,213 
Other, net   39    101 
Cash used in operating activities  $(982)  $(1,938)

 

Cash provided by financing activities for the nine months ended September 30, 2015 and 2014 was $0.9 million and $2.0 million, respectively. During the first nine months of 2015, we raised approximately $1.1 million through the issuance of convertible notes and related party advances, and made repayments of $0.2 million. During the first nine months of 2014, we raised approximately $1.6 million from the issuance of convertible notes and related party advances, made repayments of $0.4 million, and received $0.9 million from the release of cash that had been previously restricted in connection with notes issued in 2013.     

OTHER MATTERS

 

Inflation

 

We do not believe inflation has a significant effect on the Company’s operations at this time.

 

 

Off Balance Sheet Arrangements

 

Under SEC regulations, we are required to disclose the Company’s off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, results of operations, liquidity, capital expenditures or capital resources that are material to investors. Off-balance sheet arrangements consist of transactions, agreements or contractual arrangements to which any entity that is not consolidated with us is a party, under which we have:

 

Any obligation under certain guarantee contracts.
   
Any retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets.
   
Any obligation under a contract that would be accounted for as a derivative instrument, except that it is both indexed to the Company’s stock and classified in stockholder’s equity in the Company’s statement of financial position.
   
Any obligation arising out of a material variable interest held by us in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us, or engages in leasing, hedging or research and development services with us.

 

As of September 30, 2015, the Company has no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on the Company’s financial condition, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

 

 25 

 

   

VERITEQ CORPORATION AND SUBSIDIARIES

 

Forward Looking Statements

 

Certain statements and the discussion herein regarding the Company’s business and operations that are not purely historical facts, including statements about our beliefs, intentions or future expectations, may be "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, and as that term is defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements consist of any statement other than a recitation of historical fact and can be identified by the use of forward-looking terminology such as “may”, “expect”, “anticipate”, “intend”, “estimate” or the negative thereof or other variations thereof or comparable terminology. The reader is cautioned that all forward looking statements involve risks and uncertainties and are subject to change at any time, and that our actual results could differ materially from expected results. These risks and uncertainties include, without limitation, VeriTeQ’s ability to continue to raise capital to fund its operations and its proposed Acquisition of The Brace Shop; as well as other risks or events beyond VeriTeQ’s control. VeriTeQ undertakes no obligation to update or release any revisions to these forward-looking statements to reflect events or circumstances after the date of such statement or to reflect the occurrence of unanticipated events, except as required by law.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Disclosure under this section is not required for a smaller reporting company.

 

ITEM 4. CONTROLS AND PROCEDURES 

 

Evaluation of Disclosure Controls and Procedures 

 

We maintain disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934 (the "Exchange Act"), that are designed to ensure that information required to be disclosed in Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to the Company’s management, including our Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding required disclosure. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of September 30, 2015. Based upon this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2015, the Company’s disclosure controls and procedures were not effective due to the material weakness described below.

 

A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim consolidated financial statements will not be prevented or detected on a timely basis. The material weakness at September 30, 2015 pertains to a lack of expertise in the valuation of complex debt and equity instruments that are required to be reported at fair value and for their fair values to be adjusted at each accounting period.

 

To address the material weaknesses described above, the Company continues to seek assistance with various third parties with expertise in such instruments and matters of fair value, in order to ensure that the Company’s consolidated financial statements were prepared in accordance with U.S. GAAP on a timely basis.

 

Change in Internal Control over Financial Reporting 

  

There were no changes in internal control over financial reporting during the quarter ended September 30, 2015. The Company has not fully remediated its material weakness as of September 30, 2015, and remediation efforts will continue through the remainder of fiscal 2016. 

 

 26 

 

 

VERITEQ CORPORATION AND SUBSIDIARIES

 

PART II – OTHER INFORMATION

 

ITEM 1.  LEGAL PROCEEDINGS

 

None.

 

ITEM 1A. RISK FACTORS

 

Risk factors describing the major risks to our business can be found under Item 1A, “Risk Factors”, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014. There have been no changes to our risk factors from those previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

  

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

All unregistered sales of equity securities during the period have been reported on Current Reports on Form 8-K or in Item 5 below.

 

ITEM 5. OTHER INFORMATION

 

On March 7, 2016, Barry Edelstein resigned as a member of the Company’s Board of Directors for personal reasons and not based upon disputes or disagreements with the Company.

 

As of the filing of this report, Scott R. Silverman will no longer serve as the Company’s Chief Executive Officer. Kenneth Shapiro, a current director of the Company, will assume the role of Interim Chief Executive Officer of the Company effective immediately. Mr. Silverman has agreed to sell all of his rights, title and interest in and to a promissory note issued by the Company, as well as all securities of the Company currently owned by him, to an unrelated third party investor. Mr. Silverman will receive a new preferred stock instrument in the Company upon the closing of the pending transaction with The Brace Shop.

  

ITEM 6. EXHIBITS 

 

We have listed the exhibits by numbers corresponding to the Exhibit Table of Item 601 in Regulation S-K on the Exhibit list attached to this report.

   

 27 

 

 

VERITEQ CORPORATION AND SUBSIDIARIES

 

SIGNATURE

 

Pursuant to the requirements 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
  (Registrant)
     
Date: March 16, 2016 By: /s/ Marc S. Gelberg
  Name: Marc S. Gelberg
  Title: Chief Accounting Officer and
Interim Chief Financial Officer
    (Duly Authorized Officer)

 

 28 

 

 

VERITEQ CORPORATION AND SUBSIDIARIES

 

INDEX TO EXHIBITS

 

Exhibit No.   Description of Exhibit
     
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 Marc S. Gelberg, Chief Accounting Officer and Interim Chief Financial Officer, pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a)
     
32.1   Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
101.INS   XBRL Taxonomy Extension Instance Document
101.SCH   XBRL Taxonomy Extension Schema Linkbase Document
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB   XBRL Taxonomy Extension Labels Linkbase Document
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document

 

 

29