10-Q/A 1 vteq20140911_10qa.htm FORM 10-Q/A diga20140630_10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


Form 10-Q/A

Amendment No. 1

 

(Mark One)

  

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

  

  

  

For the quarterly period ended June 30, 2014

  

  

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)

  

  

220 Congress Park Drive, Suite 200, 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

 

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

 

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 (Do not check if smaller reporting company)     Smaller reporting company

 

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

 

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

Class

  

Outstanding at August 15, 2014

Common Stock, $0.01 par value per share

  

34,186,131 shares

 



 

 

 

  EXPLANATORY NOTE

 

We are filing this Amendment No. 1 on Form 10-Q/A (this “Amendment”) to amend disclosure of net loss per share with respect to the following items in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2014 as originally filed with the Securities and Exchange Commission on August 20, 2014 (the “Original Form 10-Q”): (i) the Statements of Operations for the three and six-months ended June 30, 2014 and 2013 and from December 14, 2011 (our inception) to June 30, 2014, (ii) footnotes 1 and 9 of the unaudited condensed consolidated financial statements, (iii) the signature page, (iv) the certifications of our Chief Executive and Chief Financial Officer, and (v) our financial statements formatted in XBRL in Exhibit 101.  No other sections were affected, but for the convenience of the reader, this Amendment restates in its entirety, as amended, our Original Form 10-Q.

 

 In our Original Form 10-Q, the weighted average shares outstanding – basic and diluted and the resulting loss per common share attributable to common stockholders – basic and diluted, for the three and six-months ended June 30, 2014, did not correctly state the number of weighted-average shares outstanding due to a calculation error related to shares issuable under certain right to shares agreements that the Company entered into during June 2014. The effect of this error is presented below.  No other qualitative or quantitative changes have been made to the financial statements. No event subsequent to August 20, 2014 is included in this Amendment.

 

  

 

Consolidated Statements of Operations Data

 (in thousands, except per share data)

 

   

For the Three-Months

Ended

June 30,

2014 As Previously

Reported

   

Correction

   

For the Three-Months

Ended

June 30,

2014 As Restated

 

Net loss per common share — basic and diluted

  $ (0.28 )   $ (0.12 )   $ (0.40 )

Weighted average number of common shares outstanding – basic and diluted

    19,913       (6,024 )     13,889  

 

 

   

For the Six-Months

Ended June 30, 2014

As Previously

Reported

   

Correction

   

For the Six-Months

Ended June 30, 2014

As Restated

 

Net loss per common share -- basic and diluted

  $ (0.06

)

  $ (0.02

)

  $ (0.08

)

Weighted average number of common shares outstanding – basic and diluted

    14,758       (3,002

)

    11,756  

 

 

 
 

 

 

VERITEQ CORPORATION

 

TABLE OF CONTENTS

 

 

  

Page

  

  

  

  

PART I – Financial Information

  

 

 

 

Item 1.

Financial Statements (unaudited):

  

  

Condensed Consolidated Balance Sheets – As of June 30, 2014 and December 31, 2013

3

  

Condensed Consolidated Statements of Operations – Three-Months ended June 30, 2014 and 2013

4

 

Condensed Consolidated Statements of Operations – Six-Months ended June 30, 2014 and 2013 and for the period from December 14, 2011 (Inception) to June 30, 2014

5

 

Condensed Consolidated Statements of Comprehensive Loss – Three-Months ended June 30, 2014 and 2013

6

  

Condensed Consolidated Statements of Comprehensive Loss – Six-Months ended June 30, 2014 and 2013 and for the period from (December 14, 2011 (Inception) to June 30, 2014

6

  

Condensed Consolidated Statement of Changes in Stockholders’ Deficit – For the period from December 14, 2011 (Inception) to June 30, 2014

7

  

Condensed Consolidated Statements of Cash Flows – Six-Months ended June 30, 2014 and 2013 and for the period from December 14, 2011 (Inception) to June 30, 2014

10

  

Notes to Condensed Consolidated Financial Statements

11

Item 2.

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

29

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

36

Item 4. 

Controls and Procedures

36

  

  

  

  

PART II – Other Information

  

     

Item 1.

Legal Proceedings

37

Item 1A.

Risk Factors

37

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

37

Item 4.

Mine Safety Disclosures

38

Item 5.

Other Information

38

Item 6.

Exhibits

38

  

Signatures

39

  

Certifications

 

 

 
2

 

 

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

VERITEQ CORPORATION

(formerly known as Digital Angel Corporation)

 (A Development Stage Company)

Condensed Consolidated Balance Sheets

(in thousands, except par value)

 

   

June 30,

   

December 31,

 
   

2014

   

2013

 
   

(unaudited)

         

ASSETS

               

Current assets:

               

Cash

  $ 110     $ 13  

Restricted cash

    47       882  

Accounts receivable

    20        

Inventory

    26       21  

Other receivable

          171  

Other current assets

    48       96  

Total current assets

    251       1,183  
                 

Property and equipment, net

    5       4  

Other assets

    69       14  

Intangible assets, net

    6,721       7,018  

Total assets

  $ 7,046     $ 8,219  
                 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

               

Current liabilities:

               

Notes payable, net of discounts (including $216 and $60 to related parties, respectively)

  $ 1,250     $ 467  

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

    2,137        
Liabilities for conversion option of the convertible notes     125       3,124  

Accounts payable

    1,057       854  

Accrued expenses (including $2,386 and $1,764 to related parties, respectively)

    3,580       2,718  

Due to former related party under shared services agreement

    217       211  

Total current liabilities

    8,366       7,374  
                 

Commitments and contingencies (Notes 11 and 12)

               

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

          4,925  

Warrant liabilities at fair value

    1,962       6,114  

Contingent consideration – estimated royalty obligations

    3,840       3,940  

Total liabilities

    14,168       22,353  
                 

Stockholders’ deficit:

               

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

           

Common shares ($0.01 par value; shares authorized 50,000; shares issued and outstanding, 41,480 and 9,459, respectively, including 29,097 shares issuable at June 30, 2014)

    415       95  

Additional paid-in-capital

    13,220       5,595  

Accumulated deficit during the development stage

    (20,757

)

    (19,824

)

Total stockholders’ deficit

    (7,122

)

    (14,134

)

Total liabilities and stockholders’ deficit

  $ 7,046     $ 8,219  

 

See the accompanying notes to condensed consolidated financial statements.

 

 
3

 

 

VERITEQ CORPORATION AND SUBSIDIARIES

(formerly known as Digital Angel Corporation)

(A Development Stage Company)

Condensed Consolidated Statements of Operations (Unaudited)

 (in thousands, except per share data)

 

 

   

For the Three-

Months

Ended

June 30,

2014

   

For the Three-

Months

Ended

June 30,

2013

 
    As Restated          

Sales

  $ 21     $  

Cost of goods sold

    8        

Gross margin

    13        
                 

Operating Expenses:

               

Selling, general and administrative expenses

    1,163       1,138  

Development expenses

    75       3  

Depreciation and amortization expense

    149       148  

Total operating expenses

    1,387       1,289  

Operating Loss

    (1,374

)

    (1,289

)

Other Income (Expense):

               

Change in value of convertible debt with embedded option feature

    356        
Change in fair value of conversion option of the convertible notes     2,558        

Change in value of warrant liabilities

    (5,961 )      

Other expense

    (6

)

     

Interest expense

    (1,131

)

    (253

)

Total other income (expense)

    (4,184

)

    (253

)

                 

Loss before income taxes

    (5,558

)

    (1,542

)

Benefit for income taxes

           
                 

Net Loss

  $ (5,558

)

  $ (1,542

)

                 

Net loss per common share — basic and diluted

  $ (0.40

)

  $ (0.17

)

                 

Weighted average number of common shares outstanding — basic and diluted

    13,889       9,042  

 

See the accompanying notes to condensed consolidated financial statements. 

 

 
4

 

 

 VERITEQ CORPORATION AND SUBSIDIARIES

(formerly known as Digital Angel Corporation)

(A Development Stage Company)

Condensed Consolidated Statements of Operations (Unaudited)

 (in thousands, except per share data)

 

 

   

For the Six-

Months

Ended

June 30,

2014

   

For the Six-

Months

Ended

June 30,

2013 

   

From

December 14,

2011 (Inception)

to June 30,

2014 

 
    As Restated                  

Sales

  $ 95     $     $ 113  

Cost of goods sold

    46             53  

Gross margin

    49             60  
                         

Operating Expenses:

                       

Selling, general and administrative expenses

    2,469       2,100       10,408  

Development expenses

    139       9       276  

Depreciation and amortization expense

    298       297       1,101  

Total operating expenses

    2,906       2,406       11,785  

Operating Loss

    (2,857

)

    (2,406

)

    (11,725

)

Other Income (Expense):

                       

Change in value of convertible debt with embedded option feature

    2,788              
Change in fair value of conversion option of the convertible notes     3,628             3,265  

Change in value of warrant liabilities

    (2,838 )           (4,107 )

Other expense

    (62

)

          (169

)

Interest expense

    (1,592

)

    (446

)

    (8,821

)

Total other income (expense)

    1,924

 

    (446

)

    (9,832

)

                         

Loss before income taxes

    (933

)

    (2,852

)

    (21,557

)

Benefit for income taxes

                800  
                         

Net Loss

  $ (933

)

  $ (2,852

)

  $ (20,757

)

                         

Net loss per common share — basic and diluted

  $ (0.08

)

  $ (0.32

)

     
                         

Weighted average number of common shares outstanding — basic and diluted

    11,756       8,941        

 

See the accompanying notes to condensed consolidated financial statements. 

 

 
5

 

 

VERRITEQ CORPORATION AND SUBSIDIARIES

(formerly known as Digital Angel Corporation)

(A Development Stage Company)

Condensed Consolidated Statements of Comprehensive Loss (Unaudited)

 (in thousands)

 

 

   

Three-Months Ended

June 30,

 
   

2014

   

2013

 

Net loss

  $ (5,558

)

  $ (1,542

)

Comprehensive loss

  $ (5,558

)

  $ (1,542

)

 

See the accompanying notes to condensed consolidated financial statements.

 

 

VERRITEQ CORPORATION AND SUBSIDIARIES

(formerly known as Digital Angel Corporation)

(A Development Stage Company)

Condensed Consolidated Statements of Comprehensive Loss (Unaudited)

 (in thousands)

 

   

Six-Months Ended

June 30,

   

From

December 14,

2011

(Inception)

to June 30,

2014

 
   

2014

   

2013

         

Net loss

  $ (933

)

  $ (2,852

)

  $ (20,757

)

Comprehensive loss

  $ (933

)

  $ (2,852

)

  $ (20,757

)

  

See the accompanying notes to condensed consolidated financial statements.

 

 
6

 

 

VERITEQ CORPORATION AND SUBSIDIARIES

(formerly known as Digital Angel Corporation)

(A Development Stage Company)

Condensed Consolidated Statement of Changes in Stockholders’ Deficit (Unaudited)

For the Period from December 14, 2011 (Inception) to June 30, 2014

(in thousands)

 

  

   

Preferred Stock

   

Common Stock

   

Additional

Paid-In

   

Accumulated

Deficit

   

Total

Stockholders’

 
   

Number

   

Amount

   

Number

   

Amount

   

Capital

           

Deficit

 

December 14, 2011 (Inception)

                                                       

Net Loss

                                $ (18

)

  $ (18

)

Balance, December 31, 2011

                                            (18

)

    (18

)

Net loss

                                  (1,605

)

    (1,605

)

Issuances of common stock for founders shares, January 2012

                5,563       56       (56

)

           

Issuance of common stock and assumption of stock options for acquisition, January 2012

                763       8       752             760  

Issuance of common stock to investors, April 2012

                218       2       78             80  

Issuance of common stock and warrants to investor, June 2012

                41             15             15  

Issuance of common stock for shared services, June 2012

                436       4       156             160  

Issuance of common stock warrants in connection with convertible note payable, September 2012

                            33             33  

Beneficial conversion feature of convertible note payable, September 2012

                            33             33  

Issuance of common stock warrants in connection with convertible notes payable, October 2012

                            34             34  

Beneficial conversion feature of convertible notes payable, October 2012

                            34             34  

Issuance of common stock warrants in connection with convertible notes payable, December 2012

                            41             41  

Beneficial conversion feature of convertible notes payable, December 2012

                            41             41  

Share-based compensation

                            354             354  

Balance, December 31, 2012

        $       7,021     $ 70     $ 1,515     $ (1,623

)

  $ (38

)

 

See the accompanying notes to condensed consolidated financial statements.

 

 
7

 

 

VERITEQ CORPORATION AND SUBSIDIARIES

(formerly known as Digital Angel Corporation)

(A Development Stage Company)

Condensed Consolidated Statement of Changes in Stockholders’ Deficit (Unaudited)

For the Period from December 14, 2011 (Inception) to June 30, 2014, continued

(in thousands)

 

   

Preferred Stock

   

Common Stock

   

Additional

Paid-in-

   

Accumulated

   

Total

Stockholders’

 
   

Number

   

Amount

   

Number

   

Amount

   

Capital

   

Deficit

   

Deficit

 

Balance, December 31, 2012, brought forward

        $       7,021     $ 70     $ 1,515     $ (1,623

)

  $ (38

)

Net loss

                                  (18,201

)

    (18,201

)

Issuance of restricted stock for compensation, January 2013

                    859       9       (9

)

           

Issuance of common stock and warrants for note conversion, March 2013

                95       1       194             195  

Issuance of warrants in connection with note payable, April 2013

                            35             35  

Issuance of common stock and warrants for note conversion, June 2013

                221       2       439             441  

Issuance of common stock to investor, June 2013

                19             25             25  

Acquisition of VeriTeQ Corporation (f/k/a Digital Angel Corporation) common stock, July 2013

                1,029       10       925             935  

Issuance of Series C Preferred Stock to VeriTeQ shareholders in exchange for their common stock, July 2013

    411       4,108       (8,215

)

    (82

)

    (4,026

)

           

Issuance of common stock for investment advisory services, July 2013

                42       1       62             63  

Issuance of common stock from conversion of preferred stock, October 2013

    (411

)

    (4,108

)

    8,215       82       4,026              

Adjust for cash paid in lieu of fractional shares, October 2013

                (7

)

          (16

)

          (16

)

Issuance of common stock for partial note conversion, October 2013

                17             25             25  

Issuance of common stock for investor relations services, October 2013

                33       1       90             91  

Issuance of common stock for investor relations services, November 2013

                130       1       262             263  

Share-based compensation

                            2,048             2,048  

Balance, December 31, 2013

        $       9,459     $ 95     $ 5,595     $ (19,824

)

  $ (14,134

)

 

See the accompanying notes to condensed consolidated financial statements.

 

 
8

 

 

VERITEQ CORPORATION AND SUBSIDIARIES

(formerly known as Digital Angel Corporation)

(A Development Stage Company)

Condensed Consolidated Statement of Changes in Stockholders’ Deficit (Unaudited0

For the Period from December 14, 2011 (Inception) to June 30, 2014

(in thousands)

 

   

Preferred Stock

   

Common Stock

   

Additional

Paid-in-

   

Accumulated

   

Total Stockholders’

 
   

Number

   

Amount

   

Number

   

Amount

   

Capital

   

Deficit

   

Deficit

 
                                                         

Balance, December 31, 2013, brought forward

        $       9,459     $ 95     $ 5,595     $ (19,824

)

  $ (14,134

)

Net loss

                                  (933

)

    (933

)

Issuance of common stock for partial conversion of note, February 2014

                47             70             70  

Issuance of common stock for cashless exercise of warrant, February 2014

                67       1       (1

)

           

Issuance of common stock for cashless exercise of stock options, March 2014

                363       3       (3

)

           

Beneficial conversion feature of convertible notes payable, May 2014

                            139             139  

Issuance of warrants under terms of promissory notes, May 2014

                            66             66  

Issuances of common stock for conversions of notes payable, June 2014

                677       7       128             135  

Cashless exercise of warrants under right to shares agreements, June 2014

                28,136       281       6,709             6,990  

Issuances of common stock under right to shares agreements, June 2014

                1,120       11       (11

)

           

Issuance of restricted stock to a director, June 2014

                650       7       (7

)

           

Conversion of promissory note under right to shares agreement, June 2014

                961       10       181             191  

Share-based compensation

                            354             354  
                                                         

Balance, June 30, 2014

        $       41,480     $ 415     $ 13,220     $ (20,757

)

  $ (7,122

)

 

See the accompanying notes to consolidated financial statements. 

 

 
9

 

 

VERITEQ CORPORATION AND SUBSIDIARIES

(formerly known as Digital Angel Corporation)

(A Development Stage Company)

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

 

   

For the Six-

Months Ended

June 30,

2014

   

For the Six-

Months Ended

June 30,

2013

   

From

December

14, 2011

(Inception) to

June 30, 2014

 
                         

Cash flows from operating activities:

                       

Net loss

  $ (933

)

  $ (2,852

)

  $ (20,757

)

Adjustments to reconcile net loss to net cash used in operating activities:

                       

Share based compensation

    354       916       2,756  

Depreciation and amortization

    298       297       1,101  

Non-cash interest expense

    1,568       413       8,320  

Change in fair value of subordinated convertible debt

    (2,788

)

           

Change in fair value of warrants

    2,838

 

          3,558

 

Change in fair value of conversion option of the convertible notes     (3,628 )           (3,265 )

Loss on settlement of other receivable

    56             56  

Deferred income tax benefit

       

__

      (800

)

Issuance of warrants for contract amendment

                550  

Realized loss on sale of marketable securities, available-for-sale

                107  

Issuance of common stock for investment advisory and investor relation services

                416  

Change in other receivable

    115             169  

Change in other current assets

    23    

__

      (49

)

Change in accounts payable, accrued expenses and liability under shared services agreement

    978       979       4,463  

Change in other assets

    (55

)

    (10

)

    (65

)

Net cash used in operating activities

    (1,174

)

    (257

)

    (3,440

)

                         

Cash flows from investing activities:

                       

Purchases of fixed assets

    (1

)

          (5

)

Sale of marketable securities, available-for-sale

                133  

Cash acquired from acquisition of VeriTeQ Corporation (f/k/a Digital Angel Corporation)

                818  

Net cash (used in) provided by investing activities

    (1

)

          946  
                         

Cash flows from financing activities:

                       

Proceeds from the issuances of notes payable, net of repayments of $33 in 2014

    537       50       997  

Proceeds from the issuance of common stock to investors

          25       105  

Proceeds from the issuance of senior convertible debt, net of repayments of $400 in 2014

    (100

)

          1,550  

Change in restricted cash

    835             (47

)

Cash paid in lieu of fractional shares

                (16

)

Proceeds from the issuance of common stock and warrants to investor

                15  

Net cash provided by financing activities

    1,272       75       2,604  
                         

Net increase (decrease) in cash

    97       (182

)

    110  

Cash --- Beginning of period

    13       183        
                         

Cash — End of period

  $ 110     $ 1     $ 110  
                         

Supplemental disclosure of cash flow information:

                       

Interest paid

                 

Income taxes paid

                 

  

See the accompanying notes to consolidated financial statements. 

 

 
10

 

 

 VERITEQ CORPORATION AND SUBSIDIARIES

(formerly known as Digital Angel Corporation)

 (A Development Stage Company)

Notes to Condensed Consolidated Financial Statements (Unaudited) 

 

1. Organization and Summary of Significant Accounting Policies 

 

These unaudited condensed consolidated financial statements and notes thereto, include the financial statements of VeriTeQ Corporation (“VC” or the "Company"), formerly known as Digital Angel Corporation, and its wholly-owned subsidiary, VeriTeQ Acquisition Corporation (“VAC”), a Florida corporation formed on December 14, 2011. VC became the legal acquirer of VAC and VAC became the accounting acquirer of VC pursuant to the terms of a share exchange agreement (the “Exchange Agreement”), as more fully discussed below. In January 2012, VAC acquired all of the outstanding stock of PositiveID Animal Health Corporation, a Florida corporation, from PositiveID Corporation (“PSID”), which at the time was a related party. In December 2012, VAC formed a subsidiary, VTQ IP Holding Corporation, a Delaware corporation. VC, VAC and VAC’s subsidiaries are referred to together as, “VeriTeQ,” “the Company,” “we,” “our,” and “us”. Our business consists of ongoing efforts to provide implantable medical device identification and radiation dose measurement technologies to the healthcare industry.

 

The accompanying condensed consolidated financial statements of the Company have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) and with the instructions to Form 10-Q and Article 8 of Regulation S-X under the Securities Exchange Act of 1934, as amended. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The interim financial information in this report has not been audited. In the opinion of the Company’s management, all adjustments (consisting of normal recurring adjustments) considered necessary for fair financial statement presentation have been made. Results of operations reported for interim periods may not be indicative of the results for the entire year. These condensed consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes for the year ended December 31, 2013 included in our Annual Report for Form 10-K as amended, filed with the Securities and Exchange Commission (“SEC”) on August 19, 2014.

 

Restatement and Amendment of Previously Issued Financial Statements

 

In our Original Form 10-Q filed with the SEC on August 20, 2014, the weighted average shares outstanding – basic and diluted and the resulting loss per common share attributable to common stockholders – basic and diluted, for the three and six-months ended June 30, 2014, did not correctly state the number of weighted-average shares outstanding due to a calculation error related to shares issuable under certain right to shares agreements that the Company entered into during June 2014.   The effect of this error is presented below.  No other qualitative or quantitative changes have been made to the financial statements. No event subsequent to August 20, 2014 is included in this Amendment.

 

Consolidated Statements of Operations Data

 (in thousands, except per share data)

 

   

For the Three-Months

Ended

June 30,

2014 As Previously

Reported

   

Correction

   

For the Three-Months

Ended

June 30,

2014 As Restated

 

Net loss per common share — basic and diluted

  $ (0.28 )   $ (0.12 )   $ (0.40 )

Weighted average number of common shares outstanding – basic and diluted

    19,913       (6,024 )     13,889  

 

 

   

For the Six-Months Ended

June 30, 2014

As Previously Reported

   

Correction

   

For the Six-Months Ended

June 30, 2014

As Restated

 

Net loss per common share -- basic and diluted

  $ (0.06

)

  $ (0.02

)

  $ (0.08

)

Weighted average number of common shares outstanding – basic and diluted

    14,758       (3,002

)

    11,756  

 

During the preparation of the Company’s Form 10-Q for the period ended June 30, 2014, an error was identified for the accounting of the Company's financing transaction in November 2013 which is described below. On August 19, 2014, the Company has restated and amended its consolidated financial statements for the year ended December 31, 2013 on Form 10-K/A and on August 20, 2014, the Company amended its financial statements as of and for three months ended March 31, 2014 on Form 10-Q/A to correct for impact of this error.

 

On November 13, 2013, the Company entered into a financing transaction, as more fully discussed in Note 5 to the accompanying financial statements, which included notes in the principal amount of $1,816,667. The notes are convertible into shares of the Company’s common stock at an initial exercise price of $0.75 per share. The notes provided for the initial conversion price to be reset to lower amounts in the event the Company issues its common stock or is deemed to have issued its common stock at a price below the conversion price in effect at that time. This provision results in what is referred to as an embedded derivative and should have been bifurcated and a liability recorded at fair value upon the issuance of the notes and on December 31, 2013 and on March 31, 2014. This oversight resulted in an understatement of the derivative liability of $2.1 million and $3.1 million at March 31, 2014 and December 31, 2013, respectively.

 

Going Concern

 

The accompanying financial statements have been prepared assuming we will continue as a going concern, which contemplates the realization of assets and the liquidation of liabilities in the normal course of business. We are in the development stage, have incurred operating losses since our inception and have a working capital deficit. Our cash position is critically low, and payments critical to our survival are not being made in the ordinary course. Failure to raise capital in the coming days to fund our operations and generate positive cash flow to fund such operations will have a material adverse effect on our financial condition. These factors raise substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from this uncertainty. Further, the report of the independent registered public accounting firm on the Company’s December 31, 2013 financial statements included a paragraph about the existence of substantial doubt concerning the Company’s ability to continue as a going concern.

 

We need to raise additional funds immediately and continuing until we begin to ship sufficient quantities of our products to fund our operations and we may not be able to obtain debt or equity funding at all, or if available, they may not be on favorable terms.

 

Although we had negative working capital at June 30, 2014, we are attempting to generate enough cash from: (i) capital raises; (ii) the additional issuances of promissory notes, including to related parties; (iv) business operations as we have begun to ship our products; (v) through other investing and financing sources; (vi) from our ability to continue to delay certain salary and bonus payments to senior management until funds are available; and (vii) to undertake other cash management initiatives, including working with our vendors to continue to allow us to extend payment terms in order to operate our business for the twelve months ending June 30, 2015.

 

Our goal is to achieve profitability and to generate positive cash flows from operations. Our capital requirements depend on a variety of factors, including but not limited to, the cash that will be required to grow our business operations and to service our debt. Failure to raise additional capital to fund our operations and to generate positive cash flow from such operations will have a material adverse effect on our financial condition, results of operations and cash flows.

 

 
11

 

  

Development Stage

 

The Company is in the development stage as defined by Accounting Standards Codification subtopic 915-10 Development Stage Entities ("ASC 915-10") and its success depends on its ability to obtain financing and realize its marketing efforts. To date, the Company has generated only a small amount of revenue, has incurred expenses and has sustained operating losses. Consequently, its operations are subject to all the risks inherent in the establishment of a new business enterprise. For the period from December 14, 2011 (Inception) through June 30, 2014, the Company has accumulated losses of approximately $20.8 million.

 

Share Exchange Agreement and Reverse Stock Split

 

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

 

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

 

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

 

The Series C Preferred Stock consisted of 500,000 authorized shares, 410,759 of which were issued and outstanding through October 17, 2013. The shares of Series C Preferred Stock issued to VAC’s shareholders in connection with the Share Exchange, by their principal terms:

 

(a)

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

(b)

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

(c)

were not entitled to any dividends; and

(d)

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

 

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

  

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

 

In connection with the Share Exchange, Digital Angel Corporation changed its name to VeriTeQ Corporation effective October 18, 2013.

 

 
12

 

 

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

 

Amended and Restated Certification of Incorporation and Adoption of 2014 Stock Incentive Plan

 

On June 18, 2014, the Company obtained approval from a majority of its stockholders to:

 

 

increase the number of authorized shares of the Company’s common stock from 50 million to 500 million;

 

reduce the par value of the Company’s preferred stock from $10.00 per share to $0.01 per share; and

 

adopt the Company’s 2014 Stock Incentive Plan under which 50 million shares are reserved for issuance.

The Company expects to file an Amended and Restated Certificate of Incorporation with the State of Delaware to effect the changes to its authorized shares of common stock and the par value of its preferred stock and to complete the adoption of the 2014 Stock Incentive Plan on or about August 26, 2014.

 

A portion of the increase in the authorized shares of the Company’s common stock became necessary as a result of a financing that occurred on May 30, 2014. As described in the following paragraph, that financing triggered resets in the pricing of convertible promissory notes issued by the Company on November 13, 2013, and triggered changes to the exercise price and number of shares covered by warrants issued in connection with such notes.

 

Under the terms of the May 30, 2014 financing, the Company issued promissory notes totaling $0.3 million to two investors. The promissory notes are convertible into shares of the Company’s common stock at an exercise price of $0.20 per share. As a result of the May 30, 2014 financing, certain reset provisions under the terms of existing promissory notes convertible into shares of the Company’s common stock and existing common stock warrants, which were issued on November 13, 2013, were triggered. Accordingly, the conversion price of the convertible promissory notes with an aggregate principal balance of $1,816,667 was reset to $0.20 per share from $0.75 per share of the Company’s common stock and the exercise price of the common stock warrants was changed to $0.20 per share from $2.84 per share of the Company’s common stock. In addition, the number of common stock warrants was increased from common stock warrants to acquire 2,944,444 shares of the Company’s common stock to common stock warrants to acquire 41,811,114 shares of the Company’s common stock, subject to adjustment based on the cashless provisions of the warrants.

 

On June 10, 2014, a Right to Shares Agreement was entered into with one of the holders of a promissory note and common stock warrant issued on November 13, 2013 and reset on May 30, 2014 as discussed above. The warrant holder was entitled to receive 15,199,410 warrant shares under the cashless exercise provisions of its common stock warrant but agreed to accept the lesser amount of 11,500,000 warrant shares in full satisfaction of the complete exercise of its warrant of which 495,711 shares of common stock were issued on June 13, 2014 and 474,000 shares of common stock were issued on June 27, 2014, leaving a balance remaining to be issued of 10,530,289 shares of the Company’s common stock at June 30, 2014. Subsequent to June 30, 2014 and through August 15, 2014, we have issued an additional 10,035,289 shares of the Company’s common stock under the agreement and 495,000 shares remained to be issued. The balance will be issued from time to time at the election of the holder, subject to limitations regarding the holder’s percentage of beneficial ownership, for no additional consideration.

 

On June 24, 2014, a Right to Shares Agreement was entered into with one of the holders of a promissory note and common stock warrant issued on November 13, 2013 and reset on May 30, 2014. Pursuant to the agreement, the Company and the shareholder acknowledged that the shareholder desired to (1) exchange the shareholder warrant, for a right to acquire 17,763,325 shares of common stock to be issued to the shareholder, with such right being determined based on the cashless exercise formula contained in the warrant; (2) redeem $400,000 underlying its promissory note for $400,000 in cash, and (3) convert $190,667 underlying its promissory note into 953,334 shares of common stock. Pursuant to the agreement, the shareholder has a right to receive 18,716,659 shares of common stock, and the balance of the shareholder’s remaining note that was issued on November 13, 2013 has been reduced to $190,667. The issuance of shares of the Company’s common stock will be made from time to time, subject to limitations regarding the holder’s percentage of beneficial ownership, for no additional consideration. As of June 30, 2014, we issued 150,000 shares under the June 24, 2014 Right to Shares Agreement and 18,566,659 shares of the Company common stock remained to be issued. From July 1, 2014 to August 15, 2014, we issued an additional 9,118,000 shares of the Company’s common stock under the agreement and 9,448,659 shares of the Company’s common stock remain to be issued.

 

 
13

 

 

Letter Agreement with Digital Angel Radio Communications Limited. (DARC)

 

On January 30, 2014, we and the buyers of Digital Angel Radio Communications Limited, or DARC (a former wholly-owned subsidiary operating in the United Kingdom), entered into a letter agreement under which we agreed to accept a payment of £62,000 (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, we recorded a loss of approximately USD $56,000 in the six-months ended June 30, 2014. The loss is included in other expense in our condensed consolidated statement of operations. All 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.

 

Summary of Significant Accounting Policies 

  

Principles of Consolidation 

 

The financial statements include our accounts and the accounts of our subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

   

Classification of Expenses

 

For comparative purposes, we have reclassified certain expenses related to the development of our products from selling, general and administrative expenses to development expenses in the historical financial statement presented herein.

 

Use of Estimates 

 

The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) in the United States of America (“U.S.”) requires management to make certain estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates are based on the knowledge of current events and actions we may undertake in the future, they may ultimately differ from actual results. Included in these estimates are assumptions used in determining the lives of long-lived assets, in Black-Scholes-Merton (“BSM”) valuation models in estimating the fair value of stock-based compensation and warrants, promissory notes with an embedded convertible option and royalty obligations and in determining valuation allowances for intangible assets, deferred tax assets, among others.

 

Concentration of Credit Risk 

 

We maintained our domestic cash in two financial institutions during the period ended June 30, 2014. Balances were insured up to Federal Deposit Insurance Corporation limits of $250,000 per institution. At times, cash balances may exceed the federally insured limits.

 

Other Current Assets

 

Other current assets consist primarily of deferred financing costs of approximately $20,000 at June 30, 2014 and prepaid insurance of approximately $28,000 and $74,000 at June 30, 2014 and December 31, 2013, respectively. No other items included in other current assets at June 30, 2014 and December 31, 2013 exceeded 5% of total current assets, respectively.

 

Inventory

 

Inventory consisted of purchased finished goods at June 30, 2014 and December 31, 2013. Inventory is valued at the lower of the value using the first-in, first-out (“FIFO”) cost method, or market.

 

 

Property and Equipment

 

Property and equipment, consisting primarily of computer equipment, and are 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 three years for computer equipment and 10 years for other equipment). Depreciation expense for the three-months ended June 30, 2014 and 2013 was approximately $1 thousand and nil, respectively. Depreciation expense for the six-months ended June 30, 2014 and 2013 was approximately $1 thousand and nil, respectively.

 

 
14

 

 

Intangible Assets 

 

We account for intangible assets in accordance with the Intangibles — Goodwill and Other Topic of the Codification. Intangible assets deemed to have an indefinite life, such as goodwill, are reviewed at least annually for impairment. Intangible assets with finite lives are amortized over their estimated useful lives. We do not have any intangible assets with indefinite lives.

 

We have intangible assets consisting of technology, customer relationship and trademarks, which are more fully discussed in Note 3. These intangible assets are amortized 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. We continually evaluate whether events or circumstances have occurred that indicate the remaining estimated useful lives of our definite-lived intangible assets warrant revision or that the remaining balance of such assets may not be recoverable. We use an estimate of the related undiscounted cash flows over the remaining life of the asset in measuring whether the asset is recoverable. We believe that no impairment of our intangible assets existed as of June 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. If uncertainties regarding customer acceptance exist, we intend to recognize the revenue when such uncertainties are resolved. There are no significant post-contract support obligations at the time of revenue recognition. Our accounting policy regarding vendor and post contract support obligations is based on the terms of the customers’ contracts and is billable upon occurrence of the post-sale support. Currently, there are no multiple element arrangements in connection with our product sales. Cost of products sold is recorded as the related revenue is recognized. We offer a warranty on our products and record a liability for product warranties at the time it is probable that a warranty liability has been incurred and the amount of loss can reasonably be estimated. To date, we have not incurred a warranty liability on products we have sold. It is our policy to approve all customer returns before issuing credit to the customer.

 

Stock-Based Compensation 

 

At June 30, 2014, we had five stock-based employee compensation plans which are more fully described in Note 7 to our consolidated financial statements included in our Annual Report on Form 10-K filed with the SEC on April 15, 2014. In accordance with the Compensation – Stock Compensation Topic of the Codification, awards granted are valued at fair value and compensation cost is recognized on a straight line basis over the service period of each award. On June 18, 2014, our majority stockholders approved the 2014 Stock Incentive Plan, which is more fully discussed in Note 7.

 

Income Taxes 

 

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

  

Loss Per Common Share and Common Share Equivalent 

 

Basic and diluted loss per common share has been computed by dividing the loss by the weighted average number of common shares outstanding. Since we have incurred losses attributable to common stockholders, diluted loss per common share has not been computed by giving effect to all potentially dilutive common shares that were outstanding during the period., since to do so would have been anti-dilutive. See Note 9 for the computation of basic and diluted loss per share.

 

 
15

 

 

Impact of Recently Issued Accounting Standards 

 

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

 

In June 2014, the FASB issued ASU Codification Development Stage Entities (Topic 915), Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation. The amendments related to the elimination of inception-to date information and other remaining disclosure requirements of Topic 915, which should be applied retrospectively and are effective for annual reporting periods beginning after December 15, 2014 and interim periods therein. The amendments also clarify that the guidance in Topic 275, Risks and Uncertainties, is applicable to entities that have not commenced planned principal operations. The amendments regarding Topic 275 and the sufficiency-of-equity-at-risk criterion for development stage entities of Topic 810 shall be applied prospectively. The adoption of these amendments will eliminate the inception--to–date information that is currently presented in the Company’s financial statements and may result in enhanced disclosures regarding risks and uncertainties applicable to the Company’s business. 

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09,”Revenue from Contracts with Customers (Topic 606),” (“ASU 2014-09”). ASU 2014-09 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. This new revenue recognition model provides a five-step analysis in determining when and how revenue is recognized. The new model will require revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services. ASU 2014-09 is effective for public entities for annual reporting periods beginning after December 15, 2016 and interim periods within those periods. Early adoption is not permitted. Companies may use either a full retrospective or a modified retrospective approach to adopt ASU 2014-09. The Company is currently assessing the impact that adopting this new accounting guidance will have on its consolidated financial statements and footnote disclosures.

 

2. Acquisition

Acquisition

Dates

Acquired

 

Acquisition

Price

   

Intangible

Assets

Acquired

 

Description of Assets

(in thousands)

VeriTeQ Corporation

7/08/13

  $ 935     $  

Cash, marketable securities and receivables, among others

 

 

Acquisition of VeriTeQ Corporation under Share Exchange Agreement

 

Given VAC’s former shareholders’ ownership in VC, as a result of the Exchange Agreement, VAC was considered to be the acquirer for accounting purposes and the transaction was accounted for as a reverse acquisition of VC by VAC under the accounting rules for business combinations. Accordingly, VC’s assets and liabilities were recorded at their estimated fair values to the extent they were deemed to have been acquired for accounting purposes and VC has established a new basis for its assets and liabilities based upon the fair values thereof and the value of VC’s shares outstanding on July 8, 2013, the Closing Date.

 

The results of VC have been included in the consolidated statements of operations since July 8, 2013, the date of acquisition. Unaudited pro forma results of operations for the six-months ended June 30, 2013 are included below. Such pro forma information assumes that the VC acquisition had occurred as of January 1, 2013. This summary is not necessarily indicative of what our result of operations would have been had VC been a combined entity during such period, nor does it purport to represent results of operations for any future periods.

(In thousands, except per share amounts)

 

Six-Months

Ended June 30,

2013

 

Net operating revenue

  $  

Loss from continuing operations

  $ (3,208 )

Loss per common share from continuing operations– basic and diluted

  $ (0.35 )

 

  

3. Intangible Assets 

 

Intangibles and other assets consist of the following:

 

   

June 30,

2014

   

December 31,

2013

   

Lives

(in years)

 
   

(in thousands)

   

(in thousands)

         

Technology, net of accumulated amortization of $873 and $627

  $ 5,998     $ 6,244       14  

Customer relationship, net of accumulated amortization of $176 and $141

    324       359       7  

Trademarks, net of accumulated amortization of $51 and $35

    399       415       14  
    $ 6,721     $ 7,018          

  

 
16

 

 

Amortization of intangibles charged against income amounted to $0.1 million and $0.1 million for the three-months ended June 30, 2014 and 2013, respectively, and $0.3 million and $0.3 million for the six-months ended June 30, 2014 and 2013, respectively.

 

4. Accrued Expenses

 

The following table summarizes the significant components of accrued expenses:

   

June 30,

2014

   

December 31,

2013

 
   

(in thousands)

 

Accrued payroll and payroll related

  $ 2,315     $ 1,734  

Accrued legal

    454       445  

Accrued other expenses

    811       539  

Total accrued expenses

  $ 3,580     $ 2,718  

 

5. Notes Payable and Restricted Cash

 

November 2013 Financing Transaction

 

On November 13, 2013, we entered into the securities purchase agreement (the “Purchase Agreement”) with a group of institutional investors (the “Investors”), relating to the private placement of approximately $1,816,667 in principal amount of senior secured convertible promissory notes. The notes were issued with an original issue discount of $166,667 and the aggregate purchase price of the notes was $1,650,000. Notwithstanding the purchase price of $1,650,000, $150,000 of the purchase price was be deemed paid at the closing by the cancellation of $150,000 of obligations owed by the Company to the placement agent as more fully discussed below. Therefore, the Notes were issued for a cash purchase price of $1,500,000, and with warrants to purchase up to 2,422,222 shares of our common stock, on the terms set forth below.     

   

In connection with the financing, we agreed to allow our placement agent to participate in the offering for $150,000 in lieu of our obligation to pay the placement agent a cash fee of $150,000. In addition, the placement agent will receive 5% of the aggregate cash exercise price received by us upon exercise of any warrants in the offering, and they received 222,222 warrants entitling them to purchase 222,222 shares of common stock as part of their placement agent fee. Thus, the aggregate number of warrants, issued in the financing was 2,644,444. We also issued 300,000 warrants under the terms of a letter agreement dated November 13, 2013 in connection with the financing. Thus, the warrants issued on November 13, 2013 aggregated 2,944,444.

 

In connection with the sale of the notes and the warrants issued to the Investors, (i) we entered into a registration rights agreement with the Investors (the "Registration Rights Agreement"), (ii) we and certain of our subsidiaries entered into a security and pledge agreement in favor of the collateral agent for the Investors (the "Security Agreement"), (iii) certain of our subsidiaries entered into a guaranty in favor of the collateral agent for the Buyers (the “Guaranty”), and (iv) we and each depository bank in which such bank account is maintained entered into certain account control agreements with respect to certain accounts described in the Note and the Security Agreement. The transaction closed on November 13, 2013 (the “Closing”).

 

At Closing, we received proceeds, net of $115,000 of the Investor’s expenses that were paid for by the Company, of $635,000 and approximately $750,000 of the proceeds were placed in restricted bank accounts in amounts proportionate to each Investors note balance. The restricted funds were to be applied to pay any redemption or other payment due under the applicable note to the applicable holder from time to time. Per the term of the securities purchase agreement, we were required upon the sale of 50,000 shares of MGT Capital Investments Inc.’s common stock that we owned to place the proceeds from the sale into the restricted bank accounts on a pro rata basis. Accordingly, on November 21, 2013, upon the sale of the 50,000 shares of MGT’s common stock under the terms of a stock purchase agreement, we placed approximately $132,500 into the restricted accounts. The balance in the restricted bank accounts totaled approximately $0.9 million at March 31, 2014. On April 3, 2014 and on June 16, 2014, to provide the Company with additional liquidity, several of the Investors transferred approximately $145 thousand and $0.3 million, respectively, of the restricted funds to our operating account. In connection with the Right to Shares Agreement dated June 24, 2014, $0.4 million of the restricted funds were used to pre-pay a portion of one of the outstanding notes. Therefore, the balance in the restricted accounts aggregates approximately $47 thousand as of June 30, 2014.

 

 
17

 

 

Under the terms of a May 30, 2014 financing, the Company issued promissory notes totaling $0.3 million to two of the Investors. The promissory notes are convertible into shares of the Company’s common stock at an exercise price of $0.20 per share. As a result of the May 30, 2014 financing, certain reset provisions under the terms of the November 13, 2013 promissory notes were triggered. Accordingly, the conversion price of the notes with an aggregate principal balance of $1,816,667 was reset to $0.20 per share from $0.75 per share of the Company’s common stock and the exercise price of certain warrants issued on November 13, 2014, was changed to $0.20 per share from $2.84 per share of the Company’s common stock. In addition, the number of warrants was increased from common stock warrants to acquire 2,944,444 shares of the Company’s common stock to warrants to acquire 41,811,114 shares of the Company’s common stock, subject to adjustment based on the cashless provisions of the warrants. On June 10, 2014 and June 24, 2014, the Company entered into Right to Shares Agreements with two of the Investors related to the notes and warrants. The Right to Shares Agreements are more fully discussed in Note 1.

 

Notes payable consists of the following (in thousands, except per share amounts): 

   

June 30,

2014

   

December 31,

2013

 
   

(in thousands)

 

Note originally with PSID for $200 dated January 11, 2012, bore interest at 5% per annum, was originally payable in monthly instalments beginning January 11, 2013 through December 11, 2014. Note was amended in July 2013 to allow for conversion into common stock and extend payment terms. After the note was partially converted into common stock in October 2013, PSID assigned the note to a group of lenders in November 2013. One of the lenders converted $60 of the note and $10 of accrued interest into 47 shares of common stock in February 2014. The Company issued warrants to acquire 300 shares of its common stock to PSID in connection with a letter agreement entered into in November 2013, that were reset on May 30, 2014 to warrants to acquire 4,260 shares at an exercise price of $0.20 per share. (2)(3)

  $ 115     $ 175  

Demand note for $80 issued October 11, 2013 to our CEO, bears interest at 5% per annum repaid in November 2013, February and April 2014(1)

          30  

Demand note for $30 issued October 29, 2013 to our CEO, bears interest at 5% per annum, partially repaid in April 2014(1)

    26       30  

Senior Secured Convertible Notes issued November 13, 2013 for $1,817, of which $726 was repaid or converted in June 2014, net of discount of $400 and $1,585, to group of institutional investors, are convertible into shares of common stock at $0.20 per share and mature November 13, 2014. Notes were issued with Warrants to acquire 2,644 shares of common stock with an exercise price of $2.84 per share that were reset on May 30, 2014 to warrants to acquire 37,551 shares of common stock with an exercise price of $0.20 per share of which 11,254 were outstanding on June 30, 2014. (2)(4)

    691       232  

Demand note for $60 issued January 8, 2014 to Michael Krawitz, our CFO, bears interest at 5% per annum (1)

    60        

Demand note for $60 issued January 16, 2014 to our CEO, bears interest at 5% per annum (1)

    60        

Demand note for $40 issued January 16, 2014 to our President, bears interest at 5% per annum (1)

    40        

Note for $175 issued on February 4, 2014 to Corbin Properties LLC, bears interest at 10% per annum, due February 4, 2015

    175        

Demand note for $25 issued March 4, 2014 to a Director, bears interest at 5% per annum (1)

    25        

Note for $25 issued March 5, 2014 to Deephaven Enterprises, Inc., net of discount of $22, bears interest at 9% per annum, due March 5, 2015. Effective May 30, 2014, the note became convertible into shares of common stock at a price of $0.35 per share.

    3        

Note for $25 issued on March 6, 2014, to James Rybicki Trust, net of discount of $22, bears interest at 9% per annum, due March 6, 2015. Effective May 30, 2014, the note became convertible into shares of common stock at a price of $0.35 per share.

    3        

Note for $25 issued on March 10, 2014, to William Caragol, net of discount of $25, bears interest at the rate of 9% per annum, due March 10, 2015. Effective May 30, 2014, the note became convertible into shares of common stock at a price equal to 60% of the lowest closing bid price over the 10-trading days immediately preceding a conversion notice.

           

Note for $61 issued on March 20, 2014 to Deephaven Enterprises, Inc., net of discount of $43, bears interest at the rate of 9% per annum, due March 20, 2015. Effective May 30, 2014, existing outstanding common stock warrants held by the holder became exercisable at $0.35 per share and an additional 300 warrants to acquire shares of the Company’s common stock with an exercise price of $0.35 per share were granted. (2)

    18        

Note for $25 issued April 16, 2014 to William Caragol, net of discount of $23, bears interest at 9% per annum, due April 16, 2015. Effective May 30, 2014, the note became convertible into shares of common stock at a price of $0.35 per share if conversion is elected by the holder or 60% of the lowest closing bid price over the 10-trading days immediately preceding a conversion notice if elected by the Company.

    2        

Note for $30 issued on April 16, 2014, to Ned Siegel, net of discount of $27, bears interest at 9% per annum, due April 16, 2015. Effective May 30, 2014, the note became convertible into shares of common stock at a price of $0.35 per share. (1)

    3        

Note for $20 issued on May 1, 2014, to Ned Siegel, net of discount of $18, bears interest at the rate of 9% per annum, due March 10, 2015. Effective May 30, 2014, the note became convertible into shares of common stock at a price of $0.35 per share. The note was issued with 100 warrants to acquire shares of the Company’s common stock with an exercise price of $0.35 per share. (1) (2).

    2        

Senior Convertible Note for $222 issued May 30, 2014 to an Investor, net of discount of $203, convertible into shares of common stock at $0.20 per share and matures May 30, 2015. Note was issued with an original issue discount of $22 in lieu of interest. (4)

    19        

Senior Convertible Note for $100 issued on May 30, 2014 to an Investor, net of discount of $92, convertible into shares of common stock at $0.20 per share, bears no interest, due May 30, 2015. (4)

    8        

Total notes payable

    1,250       467  

Less: Current maturities

    (1,250

)

    (467

)

                 

Note payable long-term

  $     $  
                 

Subordinated Convertible Note Payable elected at fair value:

               
                 

Non-interest bearing subordinated convertible note payable with a principal amount of $3,300 dated December 3, 2012. Note is convertible into common stock equal to 1/3 of the shares beneficially held by the CEO on the date of conversion. Note was amended in July 2013 to extend the maturity date to June 2015. The note was recorded at its fair value and will be revalued at each reporting period with changes in the fair value recorded as other expense/income.

  $ 2,137     $ 4,925  

 

(1)

These notes have been issued to related parties. See Note 10.

(2)

The warrants are more fully described in Note 7.

(3)

This note when originally issued was issued to a related party. See Note 10.

(4)

If and whenever we issue or sell, or are deemed to have issued or sold, any shares of common stock for a consideration per share less than a price equal to the conversion price in effect immediately prior to such issue or sale or deemed issuance or sale (the foregoing a “Dilutive Issuance”), then, immediately after such Dilutive Issuance, the conversion price then in effect shall be reduced to an amount equal to the new issuance price. The convertible option of these notes was bifurcated from the notes and recorded as its fair value on the date of issuance and at each reporting date, with the change in the fair value being charged/credited to other income/expense. Subsequent to June 30, 2014, the conversion price of the notes was reset as more fully discussed in Note 14.

 

 

 
18

 

 

Interest expense was approximately $1.1 million and $0.3 million for the three-months ended June 30, 2014 and June 30, 2013, respectively, and $1.6 million and $0.4 million for the six-months ended June 30, 2014 and 2013, respectively. The majority of the interest expense is due to the accretion of debt discounts and, therefore, the weighted average interest rates for each of the periods are not meaningful numbers.

 

See Note 14 for promissory notes issued subsequent to June 30, 2014.

  

6. Financial Instruments 

 

Fair Value Measurements

 

We define fair value 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, which are required to be recorded at fair value, we consider the principal or most advantageous market in which we 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.

    

We apply 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.

 

During the three and six-months ended June 30, 2014, the subordinated convertible note, which has a convertible option embedded in the note, the conversion option of the convertible notes warrant liabilities and the contingent royalty obligations, which relate to assets acquisitions during 2012, were valued using Level 3 inputs, and for the three and six-months ended June 30, 2013, the subordinated convertible note and the contingent royalty obligations were valued using Level 3 inputs. The changes in fair value of the subordinated convertible note, the conversion option of the convertible notes and the warrant liabilities during the three and six-months ended June 30, 2014 and 2013 are reflected in other income (expense) for each period. There was no change in the estimated fair value of the contingent royalty obligations during the three and six-months ended June 30, 2014 and 2013.

 

 
19

 

 

Notes Payable and Long-Term Debt 

 

At June 30, 2014 and December 31, 2013, we valued the subordinated convertible note based on the greater of the initial fair value as determined by a discounted cash flow methodology and the market value of the shares of our common stock into which it is convertible. We valued the conversion option of the convertible notes at fair value.

 

Warrant Liabilities

 

The carrying amounts approximate management’s estimate of the fair value of the warrant liabilities at June 30, 2014 based on the BSM valuation model and using the following assumptions: expected term of 4.37 years, expected volatility of 166%, risk-free interest rates of 1.25%, and expected dividend yield of 0%.

 

Conversion option of the notes

 

The carrying amounts approximates management's estimate of the embedded conversion option at June 30, 2014 and December 31, 2013 based on using a Monte Carlo method with the following assumptions: Market price of $0.14 and $2.29; terms of 0.42, 0.92 and 0.92 years; Standard deviation of 0.09, 0.11 and 0.18; and conversion price of $0.20 and $0.75, respectively.

 

Estimated Royalty Obligations

 

The carrying amount approximates management’s estimate of the fair value of royalty obligations that will be paid (discounted at rates ranging from 25% to 60%) for a period from 3 to 14 years.

 

The following table summarizes our financial assets and liabilities measured at fair value as presented in the consolidated balance sheets as of June 30, 2014 and December 31, 2013 (in thousands):

 

   

June 30, 2014

   

December 31, 2013

 
   

Level 1

   

Level 2

   

Level 3

   

Level 1

   

Level 2

   

Level 3

 
                                                 

Liabilities:

                                               

Subordinated convertible note with an embedded conversion option

  $     $     $ 2,137     $     $     $ 4,925  
Embedded conversion option of the convertible notes   $     $     $ 125     $     $     $ 3,124  

Warrant liabilities

  $     $     $ 1,962     $     $     $ 6,114  

Royalty obligations

  $     $     $ 4,000     $     $     $ 4,000  

 

 

The following is a summary of activity of Level 3 liabilities for the six-months ended June 30, 2014 (in thousands):

 

   

Subordinated
Note with
Convertible
Option

    Embedded Conversion Option of Convertible Notes    

Warrant
Liabilities

   

Estimated
Royalty
Obligations

 
                                 

Balance at December 31, 2013

  $ 4,925     $ 3,124     $ 6,114     $ 4,000  
Increase due to embedded conversion option for May 30, 2014 convertible notes payable           629              

Change in fair value

    (2,788

)

    (3,628 )     2,838        

Exercise of warrants under Right to Shares Agreements

                  (6,990

)

     
                                 

Balance at June 30, 2014

  $ 2,137 (1)    $ 125     $ 1,962     $ 4,000 (2)

 

(1) The principal balance at December 31, 2013 and June 30, 2014 is $3.3 million. See Note 5 for additional information regarding the note.

(2) Includes $160 thousand of current royalty obligations in account payable and accrued expenses at June 30, 2014.

 

The Company’s management considers the carrying values of other current assets and other current liabilities to approximate fair values primarily due to their short-term nature.

 

 
20

 

 

7. Stockholders’ Deficit

 

Preferred Stock

 

As of June 30, 2014, the Company has authorized 5,000,000 shares of preferred stock, par value $10.00 per share of which 500,000 shares were authorized as Series C Preferred Stock. The Series C Preferred Stock is more fully described in Note 1. No shares of preferred stock were outstanding as of June 30, 2014.

 

Common Stock

 

At June 30, 2014, VC had authorized 50 million shares of common stock of which approximately 12.4 million were issued and outstanding. Of the 12.4 million issued and outstanding shares of common stock at June 30, 2014, 5.7 million were beneficially owned by our Chief Executive Officer.

 

On or about August 26, 2014, the Company intends to file an Amended and Restated Certification of Incorporation with the State of Delaware to increase the number of authorized shares of its common stock to 500 million and to reduce the par value of its preferred stock to $0.01 per share as more fully discussed in Notes 1 and 14.

 

Warrants

 

We have issued warrants exercisable for shares of common stock for consideration, as follows (in thousands, except exercise price):

 

Series/ Issue Date

 

Warrants

Issued/As

Reset

   

Additional

Warrants

under

Cashless

Exercise

Provisions

   

Exercised

   

Balance
June 30,
2014

   

Exercise

Price

   

Exercisable

Period

(years)

 

Series A /June 2012

    95             (95

)

        $ 0.37       3  

Series B / September 2012

    40                   40     $ 1.57       3  

Series C / October 2012

    20                   20     $ 1.57       3  

Series C / October 2012, reset May 2014

    20                   20     $ 0.35       3  

Series D / December 2012

    14                   14     $ 1.57       5  

Series E /December 2012

    29                   29     $ 1.57       5  

Series F / March 2013

    40                   40     $ 1.57       3  

Series G / April 2013