CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(Unaudited)
NOTE
1 – ORGANIZATION, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Brace
Shop, LLC started operations in June 2004 as a Florida LLC and operates as an online retailer of orthopedic braces, physical therapy
and rehabilitation equipment.
The
Company distributes these products to the general public through its website
http://www.braceshop.com
. They also sell products
to a variety of industries and enterprises including healthcare professionals, hospitals and clinics, government institutions,
and school sports teams.
Braceshop
Real Estate Holdings, LLC, was formed as a Florida limited liability company on April 12, 2012 and is an affiliate of Brace Shop,
LLC. Brace Shop, LLC and Braceshop Real Estate Holdings, LLC (“Brace Shop”) are under common control and Brace Shop
Real Estate Holdings, LLC is considered a variable interest entity for the purpose of the consolidated financial statements.
On
November 25, 2015, Brace Shop LLC, a Florida limited liability company entered into a Stock Purchase Agreement (the “Purchase
Agreement”) with Veriteq Corporation (“Veriteq”) whereby Veriteq agreed to acquire (the “Acquisition”),
all of the issued and outstanding membership interests (the “Stock”) of Brace Shop.
The
acquisition of Brace Shop was completed on May 6, 2016 (“closing date”), at which time Brace Shop became a wholly
owned subsidiary of Veriteq. The combined companies is hereafter referred to as “the Company.” The reverse acquisition
is being accounted for as a recapitalization of Brace Shop. Brace Shop is deemed to be the acquirer in the reverse acquisition.
Consequently, the assets and liabilities and the historical operations that are reflected in the consolidated financial statements
prior to the reverse acquisition are those of Brace Shop and are recorded at the historical cost basis of Brace Shop, and the
consolidated financial statements after completion of the reverse acquisition include the assets and liabilities of Brace Shop
at historical cost, the assets and liabilities of VeriTeQ Corporation at historical cost, the historical operations of Brace Shop
and the operations of VeriTeQ Corporation from the Closing Date of the reverse acquisition. On the closing date the Company assumed
$13,828,808 of net liabilities and was deemed to have issued 39 Series E preferred shares and 965,635 common shares to the shareholders
of Veriteq. In addition, the Company assumed options for 123,500,000 shares of common stock and assumed warrants which are treated
as liabilities included in the $13,828,808 of net liabilities above (see note 14, Warrants Deemed as Liabilities). Pursuant to
the terms of the Purchase Agreement, Veriteq paid (i) $250,000 in cash to Mrs. Lynne Shapiro, the sole member of Brace Shop, (ii)
849 shares of its newly designated Series E Convertible Preferred Stock (“Series E Preferred Stock”), which is convertible
into 84.9% of the issued and outstanding shares of the Company’s common stock on a fully diluted basis, and has voting rights
on an as converted basis and (iii) a goldenshare in the form of a 5-year warrant (the “Goldenshare”), exercisable
at $0.00001 per share with a cashless exercise provision 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 Mrs. Lynne Shapiro is convertible into 84.9% of the issued and
outstanding shares of the Company’s common stock, on a fully diluted basis. At the closing of the transaction, the former
CEO of Veriteq received 39 shares of the Series E Preferred Stock convertible into 3.9% of the issued and outstanding Common Stock
on a fully-diluted basis. The shares of Series E Preferred Stock and the Goldenshare shall not be convertible until the six (6)
month anniversary of the closing of the transaction. Further, once a majority of the outstanding Series E Preferred Stock has
been converted into common stock, then any other Series E Preferred Stock then outstanding shall automatically be deemed converted
into common stock on the fifth business day following the date that a majority of the outstanding Series E Preferred Stock is
converted into common stock.
The
following table presents the liabilities and redeemable preferred stock assumed in the reverse acquisition:
Accounts
payable
|
|
$
|
696,376
|
|
Accrued
expenses
|
|
|
808,474
|
|
Interest
payable
|
|
|
1,047,115
|
|
Liability
for Conversion Option
|
|
|
3,841,921
|
|
Notes
payable, net of discounts
|
|
|
4,309,333
|
|
Warrant
liability
|
|
|
1,439,130
|
|
Subordinated
note, at fair value
|
|
|
249,495
|
|
Series
D Preferred Stock
|
|
|
1,400,000
|
|
Other
|
|
|
36,964
|
|
|
|
$
|
13,828,808
|
|
VERITEQ CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(Unaudited)
On
May 6, 2016 as part of the recapitalization the Company applied paragraph 505-10-S99-3 of the FASB Accounting Standards Codification
(Topic 4B of the Staff Accounting Bulletins (“SAB”) (“SAB Topic 4B”) issued by the US Securities Exchange
Commission (the “SEC”), by reclassifying the accumulated member’s deficit of, Brace Shop, LLC, of $2,575,902
to additional paid-in-capital.
The
Purchase Agreement contemplates that all interest, principal and any other required payments on all debt instruments of the Veriteq
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.
Basis
of Presentation
Interim
Financial Statements
The accompanying unaudited consolidated financial
statements and condensed notes thereto should be read in conjunction with the audited consolidated financial statements of Brace
Shop, LLC included in the Company’s Current Report on Form 8-K for the fiscal years ended December 31, 2015 and 2014 which
was filed on May 11, 2016. These 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 interim financial statements prepared in accordance with
accounting principles generally accepted in the United States of America (“U.S. GAAP”). In the opinion of the Company’s
management, all adjustments (consisting of normal recurring adjustments) considered necessary for the fair presentation of the
condensed interim financial statements have been made. Results of operations reported for interim periods may not be indicative
of the results for the entire year.
Principles
of Consolidation
The
unaudited consolidated financial statements include the accounts of the Veriteq Corp. and its two subsidiary’s Brace Shop,
LLC and Braceshop Real Estate Holdings, LLC. In the preparation of unaudited consolidated financial statements of the Company,
intercompany transactions and balances are eliminated.
The
accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles
in the United States of America (“US GAAP”).
Summary
of Significant Accounting Policies
Use
of Estimates
In
preparing the unaudited consolidated financial statements, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities as of the date of the unaudited consolidated financial statements and revenues
and expenses during the reporting period. Actual results may differ significantly from those estimates. Significant estimates
made by management include, but are not limited to, allowance for doubtful accounts, inventory valuation, useful life of property
and equipment, valuation of long lived assets, sales returns reserves, fair value of guarantees, assumptions used in valuation
models used in estimating the fair values of certain promissory notes, warrants, embedded conversion options, stock-based compensation
and determining valuation allowance for deferred assets.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
The Company places its cash with a high credit quality financial institution. The Company’s account at this institution
is insured by the Federal Deposit Insurance Corporation ("FDIC") up to $250,000. To reduce its risk associated with
the failure of such financial institution, the Company evaluates at least annually the rating of the financial institution in
which it holds deposits. As of September 30, 2016 the Company did not have any balances that exceeded the federally insured limits.
VERITEQ CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(Unaudited)
Accounts
Receivable
The
Company extends thirty-day credit terms to certain customers based on credit worthiness of medical supply companies, hospitals,
military, government institutions and schools. Management reviews any account receivable balances over thirty days. Account balances
that are deemed to be uncollectible are charged to the bad debt expense after all means of collection have been exhausted and
the potential for recovery is considered remote. The accounts receivable balance is comprised mostly of internet sales
due to merchant account timing differences. During the nine months ended September 30, 2016 and 2015, the Company recognized $0
of expenses related to uncollectible accounts receivable and management has determined that an allowance was not necessary at
September 30, 2016 and December 31, 2015.
Inventories
Inventories,
consisting of finished goods are stated at the lower of cost and net realizable value utilizing the first-in, first-out method.
Property
and Equipment and Building and Building Improvements
Property
and equipment and building and building improvements are carried at cost. The cost of repairs and maintenance is expensed as incurred.
When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting
gains or losses are included in income in the year of disposition. The Company examines the possibility of decreases
in the value of fixed assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.
Depreciation is calculated on a straight-line basis over the estimated useful life of the assets. Building improvements are amortized
on a straight-line basis over the building depreciable period.
Internal
Use Software
Costs
incurred to develop internal-use software during the preliminary project stage are expensed as incurred. Internal-use software
development costs are capitalized during the application development stage, which is after: (i) the preliminary project stage
is completed; and (ii) management authorizes and commits to funding the project and it is probable the project will be completed
and used to perform the function intended. Capitalization ceases at the point the software project is substantially complete and
ready for its intended use, and after all substantial testing is completed. Upgrades and enhancements are capitalized if it is
probable that those expenditures will result in additional functionality. Amortization is provided for on a straight-line basis
over the expected useful life of five years of the internal-use software development costs and related upgrades and enhancements.
When existing software is replaced with new software, the unamortized costs of the old software are expensed when the new software
is ready for its intended use.
Impairment
of Long-Lived Assets
Long-Lived
Assets of the Company are reviewed for impairment whenever events or circumstances indicate that the carrying amount of assets
may not be recoverable, pursuant to guidance established in ASC 360-10-35-15,
“Impairment or Disposal of Long-Lived Assets”
.
The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount
of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book
value. During the nine months ended September 30, 2016 and 2015 the Company recorded no impairment charges.
Loan
Costs
In
2012 the Company incurred loan costs associated with mortgage notes payable. The Company has early adopted ASU 2015-3 “Interest
– Imputation of Interest” - Simplifying the Presentation of Debt Issuance Costs. The loan costs are recorded as a
debt discount and amortized to interest expense over the terms of the mortgage notes payable.
Sales
Returns Reserve
The
Company extends a thirty-day return policy period from the date of purchase. Returns have a 15% restocking fee for refunds. The
restocking fee is waived for exchanges. The Company maintains a sales returns reserve liability account based on its estimate
of future returns.
Warranty
The
Company’s manufacturers provide the highest quality products available. If there is a defect in a product related to materials
or workmanship the Company extends the manufacturer’s warranty to its customers. Therefore no warranty liability is recorded.
Revenue
Recognition
The
Company follows the guidance of the FASB ASC 605-10-S99 “Revenue Recognition Overall – SEC Materials. The Company
records revenue when persuasive evidence of an arrangement exists, product delivery has occurred, the sales price to the customer
is fixed or determinable, and collectibility is reasonably assured. The Company derives revenue from online orders from
customers and direct sales via purchase orders to a variety of industries and enterprises including healthcare professionals,
hospitals and clinics, government institutions, and school sports teams. The Company recognizes revenue upon shipment of its products.
VERITEQ CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(Unaudited)
Cost
of Retail Sales
Cost
of retail sales includes cost of finished good products and shipping in and out costs. There was no depreciation expense that
was allocable to cost of retail sales.
Marketing
and Promotion
Marketing
and promotion is expensed as incurred. Marketing and promotion expenses for the nine months ended September 30, 2016 and 2015
were $926,733 and $1,008,164, respectively.
Shipping
Costs
Shipping
costs are included in cost of retail sales and totaled $572,602 and $567,949 for the nine months September 30, 2016 and 2015,
respectively.
Derivative
Financial Instruments
The
Company accounts 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, the Company classifies such instruments as liabilities at their fair values at the time of
issuance and adjusts the instruments to fair value at each reporting period. These liabilities 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 the Company’s statements of operations. Upon conversion of debt the fair value of the derivative is
reclassified into equity and the common stock is recorded at the book value of the debt. The fair values of these derivative
instruments have been estimated using a Monte Carlo simulation model. Unobservable inputs that, if changed, might produce a
significantly higher or lower fair value measurement of the Company’s derivative liabilities include the discount rate
used to estimate the fair value of the Company’s subordinated debt and the expected volatility used to estimate the
fair value of warrants reflected as derivative liabilities. The discount rate used to estimate the fair value of the
Company’s subordinated debt is based on rates of return achieved by market participants investing in similar
instruments, and reflects the perceived risk of investing of such instruments. Should the credit risk of the Company improve
or worsen, a lower or higher, respectively, discount rate may be appropriate, which could result in a significantly higher or
lower, respectively, measurement of fair value. The expected volatility used to estimate the fair value of warrants reflected
as derivative liabilities is based on the historical volatility of comparable publicly traded common stocks. Should the
expected volatility of the Company increase or decrease, there could be a significantly higher or lower, respectively,
measurement of fair value.
Stock-Based
Compensation
Stock-based
compensation awards to employees are measured at fair value on the grant date and compensation cost is recognized on a straight
line basis over the requisite service period of each award. Stock-based compensation awards to nonemployees are measured and expensed
at fair value at the date services are rendered.
Loss
per Common Share
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.
VERITEQ CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(Unaudited)
The
following stock options and warrants and shares issuable upon conversion of convertible notes payable outstanding at September
30, 2016 and 2015 were not included in the computation of dilutive loss per share because the net effect would have been anti-dilutive:
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2016
|
|
|
2015
|
|
Stock
options
|
|
|
123,500,000
|
|
|
|
-
|
|
Warrants
|
|
|
91,054,552
|
|
|
|
-
|
|
Shares
issuable upon conversion of Series D preferred stock
|
|
|
27,988,804
|
|
|
|
-
|
|
Shares
issuable upon conversion of convertible notes payable
|
|
|
237,990,962
|
|
|
|
-
|
|
Shares
issuable upon conversion of subordinated note
|
|
|
20,257,095
|
|
|
|
-
|
|
Shares
issuable upon conversion of Series E preferred stock
|
|
|
1,383,715,403
|
|
|
|
|
|
Shares
issuable to a consultant
|
|
|
665,309
|
|
|
|
-
|
|
|
|
|
1,885,172,125
|
|
|
|
-
|
|
Income
Taxes
Prior
to May 6, 2016 Brace Shop, LLC and Braceshop Real Estate Holdings, LLC were single member Limited Liability Companies (LLC) and
as such were disregarded entities for federal income tax purposes. Accordingly, all income was reported on the member’s
personal income tax return and no provisions for income taxes were reported in the Brace Shop, LLC’s consolidated financial
statements.
Starting
on May 6, 2016, income taxes are accounted for under the asset and liability method as prescribed by ASC Topic 740: Income Taxes
(“ASC 740”), except for Braceshop Real Estate Holdings, LLC which as a VIE remains owned by an individual member and
therefore as a disregarded entity is taxed on the member’s personal income tax return. Deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities, and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance, when in the Company's
opinion it is likely that some portion or the entire deferred tax asset will not be realized.
Pursuant
to ASC Topic 740-10: Income Taxes related to the accounting for uncertainty in income taxes, the evaluation of a tax position
is a two-step process. The first step is to determine whether it is more likely than not that a tax position will be sustained
upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position.
The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit
to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than
50% likelihood of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not
recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized
tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial
reporting period in which the threshold is no longer met. The accounting standard also provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosures, and transition. The adoption had no effect on the
Company’s consolidated financial statements.
Concentrations
of Major Customer and Major Vendors
Brace
Shop, LLC holds a United States Government GSA VA government contract. Revenues from this contract are approximately 1.71% and
1.59% of total revenues in for the nine months ended September 30, 2016 and 2015, respectively. The loss of this contract or any
other government contract or institutional supply contract could have an effect on our sales. If the Brace Shop failed to maintain
the proper reporting or management of the VA contract, this could result in a loss of business.
As
of September 30, 2016 100% of accounts receivable was due from one customer.
As
of December 31, 2015 approximately 83% of accounts receivable was due from one merchant bank related to the processing of on-line
orders.
As
of September 30, 2016, three vendors accounted for 39% of accounts payable.
As
of December 31, 2015, three vendors accounted for 38% of accounts payable.
The
Brace Shop, LLC has a concentration of major vendors. During the nine months ended September 30, 2016, two vendors accounted for
49% of cost of retail sales as follows; 25% and 24%.
VERITEQ CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(Unaudited)
The
Brace Shop, LLC has a concentration of major vendors. During the nine months ended September 30, 2015, two vendors accounted for
45% of cost of retail sales as follows; 21% and 24%.
The
Company had foreign sales totaling $230,887 or 5% of total revenue of $5,014,251 for the nine months ended September 30, 2016.
For the nine months ended September 30, 2015 the Company had foreign sales totaling $321,078 or 6.5% of total revenue of $5,228,835.
Segment
Reporting
Per
review of ASC Topic 280, “Segment Reporting” it has been determined that the Company operates in one segment. Braceshop
Real Estate Holdings, LLC and Brace Shop have a Variable Interest Entity (VIE) relationship, however the revenue stream related
to the VIE is eliminated in consolidation.
Related
Parties
Parties
are considered to be related to the Company if the parties that, directly or indirectly, through one or more intermediaries, control,
are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company,
its management, members of the immediate families of principal owners of the Company and its management and other parties with
which the Company may deal if one party controls or can significantly influence the management or operating policies of the other
to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. The Company
discloses all related party transactions. All transactions shall be recorded at fair value of the goods or services exchanged.
Property purchased from a related party is recorded at the cost to the related party and any payment to or on behalf of the related
party in excess of the cost is reflected as a distribution to related party.
Recent
Accounting Pronouncements
From
time to time, the Financial Accounting Standards Board (“FASB”) or other standards setting bodies will issue new accounting
pronouncements. Updates to the FASB ASC are communicated through issuance of an Accounting Standards Update (“ASU”).
There have been no new relevant pronouncements since those disclosed in the December 31, 2015 Consolidated Financial Statements.
NOTE
2 – GOING CONCERN
The
accompanying unaudited consolidated financial statements are prepared assuming the Company will continue as a going concern
which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. At September
30, 2016, the Company had a stockholders’ deficit of $18,966,316 and a working capital deficiency of $17,586,836. For
the nine months ended September 30, 2016 the net loss totaled $3,097,296. The net cash used in operating activities for the
nine months ended September 30, 2016 totaled $361,671. These matters raise substantial doubt about the Company’s
ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon
increasing sales and obtaining additional capital and financing. While the Company believes in the viability of
its strategy to increase sales volume there can be no assurances to that effect. The Company's limited financial resources
have prevented the Company from aggressively advertising its products to achieve increased consumer recognition. These
unaudited consolidated financial statements do not include any adjustments relating to recovery of recorded assets or
classification of liabilities should the Company be unable to continue as a going concern.
NOTE
3 – INVENTORY
Inventory,
consists of finished goods which are stated at the lower of cost and net realizable value utilizing the first-in, first-out method.
As of September 30, 2016 and December 31, 2015 the inventory balances were $216,584 and $301,883, respectively.
NOTE
4 – MORTGAGE NOTES PAYABLE
On
June 29, 2012 Braceshop Real Estate Holdings, LLC executed a mortgage note payable to a bank in the amount of $477,500 relating
to an office condominium where the Company’s corporate offices are located. The terms of the note includes the Company remitting
nine monthly consecutive interest payments, beginning July 29, 2012, with interest calculated on the unpaid principal balance
using an interest rate of 5.3% per annum based on a year of 360 days; one hundred nineteen monthly consecutive principal and interest
payments of $3,252 each beginning April 29, 2013, with interest calculated on the unpaid principal balance using an interest rate
of 5.3% per annum based on a year of 360 days and one principal and interest payment of $304,535 due on March 29, 2023. Braceshop
Real Estate Holdings, LLC recorded loan costs on the mortgage note payable as a debt discount. The loan costs are being amortized
over the term of the mortgage notes payable. The effective interest rate resulting from the debt discounts was not materially
changed from the 5.3%. The balance of the mortgage note payable was $421,660, net of debt discount of $4,682 (principal balance
of $426,342) and $432,882, net of debt discount of $5,202 (principal balance of $438,084) as of September 30, 2016 and December
31, 2015 respectively.
VERITEQ CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(Unaudited)
On
June 29, 2012 Braceshop Real Estate Holdings, LLC executed a mortgage note payable due to the Florida Business Development Corporation
(FBDC) and guaranteed by the U.S. Small Business Administration (SBA) in the amount of $393,000 related to an office condominium
where the Company’s corporate offices are located. This note replaced a bridge note from a bank which was outstanding from
June 2012 to June 2013. The terms of the note includes an interest rate of 2.10738%, first payment due June 1, 2013 with a note
maturity date of May 1, 2033. The balance of the mortgage note payable was $338,157 and $350,760 as of September 30, 2016 and
December 31, 2015 respectively. The FBDC mortgage is a second mortgage subordinated to the bank mortgage discussed above.
Both
of the above mortgage notes are personally guaranteed by the sole member of Braceshop Real Estate Holdings, LLC and the sole member’s
spouse who is the Company’s CEO and guaranteed by Brace Shop, LLC.
NOTE
5 – LINE OF CREDIT
On
September 30, 2013 the Company opened a $350,000 bank line of credit with a bank with a maturity date of September 30, 2015 collateralized
by the assets of the Company. The terms of the line of credit state the Company will pay regular monthly payments of accrued interest
beginning October 30, 2013 and all subsequent interest payments are due on the same day each month going forward. The Company
was to pay this line of credit in one payment of all outstanding principal plus all accrued unpaid interest on September 30, 2015.
The line of credit has a variable interest rate which is the highest Prime Rate as published in the “Money Rates”
section of the Wall Street Journal plus 1.75 percent (3.5% at March 31, 2016). As of March 31, 2016 the line of credit is in default.
The Company’s management executed a Forbearance and Modification Agreement related to the line of credit on June 1, 2016.
Modified payments commenced on June 1, 2016 and are due on the first of each month going forward until April 1, 2017. The monthly
payments will be $17,500 for the period of June 1, 2016 through July 1, 2016; $20,000 for the period of August 1, 2016 through
September 1, 2016; and $25,000 for the period of October 1, 2016 through April 1, 2017. A final payment for the remaining balance
is due on May 1, 2017. The balance of the line of credit amounted to $278,404 and $349,000 as of September 30, 2016 and December
31, 2015, respectively.
NOTE
6 – NOTES PAYABLE
Notes
payable consist of the following:
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(unaudited)
|
|
Convertible
notes payable with a bifurcated conversion option (including premium of $160,000)
|
|
|
5,063,210
|
|
|
|
0
|
|
Related
party notes payable
|
|
|
250,000
|
|
|
|
125,000
|
|
Other
notes payable
|
|
|
197,001
|
|
|
|
249,322
|
|
Discounts
on notes payable
|
|
|
(365,992
|
)
|
|
|
(33,071
|
)
|
|
|
|
5,144,219
|
|
|
|
341,251
|
|
Less
current portion
|
|
|
(5,010,886
|
)
|
|
|
(341,251
|
)
|
Non-current
notes payable
|
|
|
133,333
|
|
|
|
-
|
|
VERITEQ CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(Unaudited)
Convertible
notes
New
Activity in 2016 consists of the following:
On
May 6, 2016 the Company assumed $4,485,541 of convertible notes made up of 56 different notes from 19 lenders and $176,208 of
discounts as a result of the reverse acquisition and recapitalization (see note 1). The assumed convertible notes have conversion
terms which includes 39% to 40% discounts of the average trading prices ranging of one to three days of the lowest traded prices
for periods of ten to thirty days prior to conversion.
On
February 26, 2016, the Company borrowed funds and issued a 16% senior secured convertible promissory note with a principal
balance of $240,000. Payments of $8,267 are due on the first and fifteenth of each month starting April 1, 2016 and ending
September 15, 2017. The installments will pay off the note in full. The note matures on August 26, 2017. The note is
convertible into shares of VeriTeQ Corporation at 60% of the lowest trading price in the prior 10 trading days prior to the
date of conversion. The Company recorded this as stock settled debt with a $160,000 premium. In the event of a default, the
note holder may elect the Company to redeem the note in cash by wire transfer of immediately available funds at a price equal
to the greater of (x) 115% of the Conversion Amount being redeemed and (y) the product of (A) the Conversion Amount being
redeemed and (B) the quotient determined by dividing (I) the greatest Closing Sale Price of the shares of Common Stock during
the period beginning on the date immediately preceding such event of default. In the event that the note is converted or
redeemed (including via an Event of Default) prior to the maturity date, the Company shall pay to the note holder, in
addition to any other amounts then owed, in cash upon such conversion or redemption, an amount in interest equal to the
amount of interest that would otherwise have been payable if the note had been held until the maturity date. If the Company
fails, on or prior to the Share Delivery Date, to issue and deliver a certificate to the note holder, the number of shares of
Common Stock to which the note holder is entitled upon the note holder’s conversion of any Conversion Amount (a
“Conversion Failure”), then (A) the Company shall pay damages to the note holder for each Trading Day of such
Conversion Failure in an amount equal to 1.5% of the product of (1) the sum of the number of shares of Common Stock not
issued to the note holder on or prior to the Share Delivery Date and to which the note holder is entitled, and (2) any
trading price of the Common Stock selected by the note holder in writing as in effect at any time during the period beginning
on the applicable Conversion Date and ending on the applicable Share Delivery Date and (B) the note holder, upon written
notice to the Company, may void its Conversion Notice with respect to, and retain or have returned, as the case may be, any
portion of the senior secured promissory note that has not been converted pursuant to such Conversion Notice; provided that
the voiding of a Conversion Notice shall not affect the Company’s obligations to make any payments which have accrued
prior to the date of such notice. The Company shall not effect the conversion of any portion of the senior secured promissory
note, and the note holder shall not have the right to convert any portion of the senior secured promissory note, to the
extent that after giving effect to such conversion, the note holder together with the other Attribution Parties collectively
would beneficially own in excess of 4.99% (the “Maximum Percentage”) of the shares of Common Stock outstanding
immediately after giving effect to such conversion. On each applicable Installment Date, the Company shall pay the
installment amount by redeeming such installment amount in cash (a “Company Redemption”) or, if elected by the
note holder, such combination of the installment amount in cash and Common Stock, provided that certain equity conditions
have been met. At any time upon ten (10) business days prior written notice to the note holder, the Company may redeem all or
any portion of this senior secured promissory note by delivering written notice thereof (the “Redemption Notice”)
to the note holder, which Redemption Notice shall indicate the portion of the senior secured promissory note the Company is
electing to require the note holder to redeem. Each portion of the senior secured promissory note subject to redemption by
the Company shall be redeemed by the Company in cash by wire transfer of immediately available funds at a price equal 115% of
the amount being redeemed. As of September 30, 2016 the Company has only remitted one payment of $8,267 to the lender
related to this promissory note. As of September 30, 2016 the balance of this convertible promissory note amounted to
$393,333, including the premium of $160,000.
On
June 14, 2016, the Company issued additional promissory notes in the aggregate principal amount of $668,502, for which the Company
received proceeds of $47,000, net of $53,000 paid directly to vendors and $5,000 of original issue discounts and $563,502 to consolidate
and refinance certain previously issued promissory notes with the same lender aggregating $536,670. The two lenders were also
issued warrants for 1,565,286 and 291,667 common shares exercisable at $0.1755 and $0.1755 per share (with cashless exercise rights)
which warrants expire on June 14, 2018. 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.
With
respect to the June 14, 2016 note, 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.
VERITEQ CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(Unaudited)
These
above June 14, 2016 notes and the convertible notes assumed on May 6, 2016 include embedded conversion options which will be bifurcated
and accounted for as derivative liabilities at fair value (see Note 1). For warrant instruments the Company classifies such instruments
as liabilities at their fair values at the time of issuance and adjusts the instruments to fair value at each reporting period.
These liabilities 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 the Company’s statements of operations. Upon conversion or exercise of a derivative
instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity.
On
August 16, 2016 the Company issued a convertible promissory note with a principal amount of $52,500 for which the Company received
$50,000 in proceeds net of original issue discount of $2,500. This note is due one year after the date of issuance, bears interest
at a rate of 12% per annum, and is convertible into shares of common stock at the lesser of (i) $0.18 per share or (ii) 60% of
the average of the three lowest trading prices of the Company’s common stock during the 15 days prior to conversion.
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.
These
above notes include embedded conversion options which were bifurcated and accounted for as derivative liabilities at fair value.
These liabilities 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 the Company’s statements of operations.
Related
party notes payable
On
each of January 6, 2016 and February 4, 2016 the CEO/sole member of the Company advanced $62,500 which was memorialized in a $125,000
non-interest bearing promissory note payable to the CEO/sole member of the Company on February 4, 2016. The note matures on May
1, 2016, however the note maturity date was extended to December 1, 2016.
Other
notes payable
On
June 27, 2016 the Company issued a promissory note with a principal balance of $184,500, an original issue discount (OID) of $34,500
and a debt issue cost discount of $2,630. The OID and issue costs are to be amortized over the term of the note. The Company received
cash proceeds of $147,370 related to this promissory note. The terms of this promissory note include the lender drafting $1,025
each business day from the Company’s primary business account. The balance of this note payable amounted to $97,260 net
of debt discount and OID of $18,565 as of September 30, 2016.
On
July 1, 2016 the Company issued a promissory note with a principal balance of $103,664 and an original issue discount of $6,664.
The terms of repayment require the Company to make aggregate payments of not less than 10% of the principal balance every 90 days
beginning at the end of the cancellation period (the third calendar day after funding was received) and ending when the principal
amount has been paid in full or 540 days after the end of the cancellation period, whichever first occurs. The debt discount will
be amortized over the term of the note. This note is collateralized by the Company’s PayPal account, any other PayPal account
of the Company and all balances in such PayPal accounts, all general intangibles defined in Article 9 of the Uniform Commercial
Code as in effect in the state of Utah, all payment intangibles, all rights to payment and other rights of the Company in connection
with the Company’s PayPal account or any other PayPal account of the Company including all monies, cash equivalents, and
all proceeds and products , whether tangible or intangible related to the PayPal accounts mentioned above. The balance of this
note payable amounted to $75,647 net of debt discount and OID of $5,529 as of September 30, 2016.
Interest
expense was approximately $759,000 and $38,000 for the nine months ended September 30, 2016 and 2015, respectively.
VERITEQ CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(Unaudited)
NOTE
7 – SUBORDINATED DEBT REPORTED AT FAIR VALUE
On
May 6, 2016 as a result of the reverse acquisition and recapitalization (see note 1) the Company assumed a non-interest bearing
secured subordinated convertible note accounted for using the fair value option under ASC 825 “Financial Instruments”
(SNC Note). The fair value note was $249,495 on the assumption date and the note had a principal amount due of $3.3 million. Changes
in the fair value are recorded through the Company’s statement of operations in each accounting period. The SNC Note is
secured by all of the assets acquired by Veriteq under the 2012 asset purchase agreement (the “SNC Collateral”) consisting
primarily of intellectual property. The note is convertible into one-third of the beneficial common stock ownership of the former
CEO of Veriteq. At September 30, 2016 the former CEO owned 39 shares of Series E preferred stock convertible into 3.9% of the
outstanding common stock of the Company on a fully diluted basis. Under the terms of the SNC Note, as amended, 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 assets. As of the date of this report, the collateral
has not been accepted by the holder of the SNC Note and the SNC Note remains outstanding (see note 15). The fair value of the
note was $300,601 at September 30, 2016.
NOTE
8 – RELATED PARTIES LOANS PAYABLE
On
September 29, 2015, the Chief Executive Officer (CEO) of the Company, who is the sole member of the LLCs, advanced a non-interest
bearing loan of $100,000 to the Company for operating activities. During 2015 the Company repaid the CEO $28,000. The balance
of the loan amounted to $72,000 as of September 30, 2016 and December 31, 2015.
On
October 19, 2015, the Medical Director of the Company who is the husband of the sole member advanced a non-interest bearing loan
of $49,500 to the Company for operating activities. The balance of the loan amounted to $49,500 as of September 30, 2016 and December
31, 2015.
NOTE
9 – GUARANTEE LIABILITY
The
Brace Shop, LLC, the CEO of the Company and VeriTeQ Corporation, are parties to a Stock Purchase Agreement dated November 25,
2015. The sole member of Brace Shop, LLC, is to sell all of her membership interests in Brace Shop, LLC to VeriTeQ Corporation.
Pursuant to the Stock Purchase Agreement a portion of the purchase price payable by VeriTeQ was financed by the sale of a senior
secured convertible promissory note in the principal amount of $147,058 by VeriTeQ Corporation to a third party and then advanced
to the seller. In February 2016, pursuant to the Stock Purchase Agreement another portion of the purchase price payable by VeriTeQ
was financed by the sale of a senior secured convertible promissory note in the principal amount of $147,058 by VeriTeQ Corporation
to a third party and then advanced to the seller. Brace Shop, LLC signed a Security Agreement securing the VeriTeQ promissory
note with certain Brace Shop, LLC assets. Pursuant to ASC 460 this creates an indirect guarantee of the debt of a third party.
Brace Shop, LLC guaranteed this debt in anticipation of closing on the Stock Purchase Agreement. Per ASC 460 the indirect guarantee
of the promissory note was recorded on the consolidated financial statements of Brace Shop, LLC at its estimated fair value of
$294,117 and $147,058 as of March 31, 2016 and December 31, 2015, respectively. On May 6, 2016 the acquisition of Brace Shop was
completed, at which time Brace Shop became a wholly owned subsidiary of the Company. As a result of the completion of the acquisition
the guarantee liability of $294,117 was removed from the balance sheet and recognized as other income on the statement of operations.
NOTE
10 – COMMITMENTS AND CONTINGENCIES
The
Company has entered into a lease for its office space as disclosed in Note 11 – Variable Interest Entity.
The
Company is in default on its bank line of credit. The line is secured by the assets of the Company (see Note 5).
In
November 2015 the Company executed a 6-month consulting agreement related to the Stock Purchase Agreement discussed in Note 1.
The agreement requires monthly cash payments of $8,000 plus $25,000 worth of common stock quarterly after consummation of a reverse
merger for any remaining term or renewal term of the agreement. The agreement automatically renews every six months unless otherwise
terminated by either party with 30 days advance notice. As of September 30, 2016 the Company has accrued $33,332 of consulting
fees pursuant to the common shares due under the consulting agreement. As of September 30, 2016 there has not been any common
shares issued related to the consulting agreement.
As
a result of the foreclosure and disposal of Veriteq’s VAC subsidiary, prior to the reverse acquisition of May 6, 2016, approximately
$2.6 million of liabilities were deconsolidated. There is a possibility that creditors could pursue claims against the Company
in connection with these liabilities.
In
October 2015, the Company executed five Consent and Release Agreements with five different noteholders. The related notes totaled
$755,620. The Company’s interpretation of the Consent and Release Agreements was that all the associated debt related to
these note holders was forgiven. The noteholders allege the debt is still outstanding, however in April 2016 one of the noteholders
forgave $319,000 of his notes in connection with a separate release agreement. As of September 30, 2016 the remaining debt in
dispute is recorded on the books of the Company until this dispute is resolved.
In February 2017
the Company received notice of a filing of a lawsuit from a party claiming rights as a partial assignee of debt held by a prior
lender to the Company. The lawsuit alleges damages consisting of principal, interest and costs totaling $374,742. The Company
has not determined the validity of the claim or potential defenses to the lawsuit. However, to the extent that the claim
is based on notes from a lender of record of the Company, all appropriate amounts for principal and interest are believed to be
recorded in the Company’s records as of the balance sheet date.
VERITEQ CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(Unaudited)
NOTE
11 – VARIABLE INTEREST ENTITY
Current
Generally Accepted Accounting Principles (GAAP) requires a reporting entity to consolidate a Variable Interest Entity (VIE) when
that reporting entity is considered to be the primary beneficiary of the VIE. As a result, VIE guidance requires in certain circumstances,
a reporting entity (lessee) to consolidate a lessor entity when both entities are under common control.
On
March 20, 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-07, Consolidation
(Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements, providing private companies
with accounting alternatives for lease arrangements meeting specified criteria. This ASU is the third accounting alternative for
private companies endorsed by the FASB based upon recommendations of the Private Company Council (PCC).
In
December 2013, the FASB issued ASU 2013-12, Definition of a Public Business Entity – An addition to the Master Glossary,
which defines a public business entity for purposes of GAAP in ASUs issued subsequent to ASU 2013-12 (it does not change existing
definitions of public and nonpublic entities contained within GAAP resulting from standards prior to ASU 2013-12). This definition
is not limited to companies that are registered with the U.S. Securities and Exchange Commission, but includes, among others,
entities whose financial statements are included in filings with the SEC and entities with securities traded in the OTC markets.
As such, an entity considering adoption of the accounting alternatives provided in this Update should first evaluate whether they
are within the scope of the Update.
Per
Review of ASU 2013-12 C Brace Shop, LLC and Braceshop Real Estate Holdings, LLC need to consolidate due to a VIE relationship
because (i) Brace Shop is the primary beneficiary of Braceshop Real Estate Holdings, LLC since it occupies the office space and
(ii) Brace Shop provides financial support to Braceshop Real Estate Holdings, LLC by making rental payments for the property and
both are under common control. Since Brace Shop consolidated into Veriteq Corp., a public company, filing with the SEC they are
not able to use the alternative provided by ASU 2014-07 for private companies.
Brace
Shop, LLC and Braceshop Real Estate Holdings, LLC entered into a lease agreement in July 2012 where in Brace Shop rents office
space from Braceshop Real Estate Holdings, LLC. During the nine months ended September 30, 2016 and 2015 Brace Shop recorded $138,907
and $136,067 respectively, of rent expense for the office, which is eliminated in consolidation.
The
assets and liabilities of the VIE are as follows:
|
|
9/30/2016
|
|
|
12/31/2015
|
|
ASSETS:
|
|
|
|
|
|
|
Cash
|
|
$
|
-
|
|
|
$
|
2,727
|
|
Office
Building and Building Improvement, net
|
|
|
870,078
|
|
|
|
888,846
|
|
Total
Assets
|
|
$
|
870,078
|
|
|
$
|
891,573
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts
Payable
|
|
$
|
33,865
|
|
|
$
|
46,742
|
|
Mortgage
Notes Payable, net of discount
|
|
|
759,817
|
|
|
|
783,642
|
|
Total
Liabilities
|
|
$
|
793,682
|
|
|
$
|
830,384
|
|
The
building and building improvements have been presented separately on the accompanying unaudited consolidated balance sheets as
they are secured by a first and second mortgage held by VIE creditors. Furthermore, as discussed in Note 4 the primary beneficiary,
Brace Shop, LLC, has guaranteed the mortgage note obligations.
VERITEQ CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(Unaudited)
NOTE
12 – RELATED PARTY
The
Company has the following balances and transactions with related parties (see Notes 6 and 8):
On
September 29, 2015, the Chief Executive Officer (CEO), who was then the sole member of the LLCs, of the Company advanced a non-interest
bearing loan of $100,000 to the Company for operating activities. During 2015 the Company repaid the CEO $28,000. The balance
of the loan amounted to $72,000 as of September 30, 2016 and December 31, 2015.
On
October 19, 2015, the Medical Director of the Company who is the husband of the then sole member advanced a non-interest bearing
loan of $49,500 to the Company for operating activities. The balance of the loan amounted to $49,500 as of September 30, 2016
and December 31, 2015.
On
November 27, 2015, the Company issued a $125,000 non-interest bearing promissory note payable to the then CEO/sole member of the
Company. The CEO/sole member provided the Company funds for general operating expenses. The note matured on April 1, 2016, however
the note was extended to December 1, 2017.
On
February 4, 2016, the Company issued another $125,000 non-interest bearing promissory note payable to the CEO/sole member of the
Company. The CEO/sole member provided the Company funds for general operating expenses. The note matured on May 1, 2016, however
the note was extended to December 1, 2017.
NOTE
13 – FINANCIAL INSTRUMENTS
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.
During
the nine months ended September 30, 2016 and the year ended December 31, 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 nine months ended September 30, 2016 and the year ended December 31, 2015 are reflected in the changes in fair value
of derivative and other fair valued instruments in the Company’s statement of operations.
As
of September 30, 2016 the fair value of the convertible subordinated debt was determined using a discounted cash flow model. The
fair value of the November 2013 Warrants and the bifurcated embedded option in the convertible notes were determined using various
Monte Carlo simulations.
VERITEQ CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(Unaudited)
The
following table summarizes our financial assets and liabilities measured at fair value as presented in the balance sheets as of
September 30, 2016 and December 31, 2015 (in thousands):
|
|
September
30, 2016
|
|
|
December
31, 2015
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated
debt
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
301
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Bifurcated
option in convertible notes
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,078
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Warrant
liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,468
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The
following is a summary of activity of Level 3 liabilities for the nine months ended September 30, 2016:
|
|
SNC
Note
|
|
|
Bifurcated
embedded option in convertible notes
|
|
|
Warrant
liabilities
|
|
Balance
at December 31, 2015
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Recapitalization
|
|
|
249
|
|
|
|
3,842
|
|
|
|
1,439
|
|
Issuance
of additional debt
|
|
|
|
|
|
|
123
|
|
|
|
206
|
|
Conversion
of notes into share of common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses
(gains) included in net loss
|
|
|
52
|
|
|
|
2,113
|
|
|
|
(177
|
)
|
Balance
at September 30, 2016
|
|
$
|
301
|
|
|
$
|
6,078
|
|
|
$
|
1,468
|
|
NOTE
14 – STOCKHOLDERS’ DEFICIT
Preferred
Stock
As
part of the recapitalization of equity related to the May 6, 2016 acquisition described in Note 1, the Company has authorized
5 million shares of preferred stock, par value $0.01 per share, and assumed 1,400 shares of Series D Preferred Stock outstanding
presented as temporary equity of $1,400,000 and is deemed to have issued 39 shares of Series E preferred stock to the original
shareholders of Veriteq Corp. In addition, the Company had 849 shares of Series E preferred stock outstanding. The total 888 shares
of the Series E stock is convertible into 88.8% of the issued and outstanding Common Stock on a fully-diluted basis, however it
is not convertible until the six (6) month anniversary of the closing of the reverse acquisition transaction on May 6, 2016. Further,
once a majority of the outstanding Series E Preferred Stock has been converted into common stock, then any other Series E Preferred
Stock then outstanding shall automatically be deemed converted into common stock on the fifth business day following the date
that a majority of the outstanding Series E Preferred Stock is converted into common stock.
Common
Stock
As
part of the recapitalization of equity related to the May 6, 2016 reverse acquisition described in Note 1, the Company has authorized
100 billion shares of common stock, par value $0.00001 per share, and is deemed to have issued 965,635 common shares to the original
shareholders of Veriteq Corp.
Warrants
Deemed as Liabilities
As
part of the recapitalization of equity related to the May 6, 2016 reverse acquisition described in Note 1, the Company assumed
$1,439,130 of warrant liabilities at fair value as of May 6, 2016. The Company issued warrants in connection with a debt financing
with an initial fair value of $206,324 in June 2016. The Company recognized a change in fair value of warrant liabilities of income
of $177,624 related to the fair value of the warrant liabilities for the period ended September 30, 2016. As of September 30,
2016 the balance of the warrant liability was $1,467,830.
VERITEQ CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(Unaudited)
Stock
Options and Restricted Stock
In
accordance with the Compensation – Stock Compensation Topic of the Codification, awards of stock options are recorded at
fair value on the date of grant and compensation cost is recognized on a straight line basis over the service period of each award.
Upon exercise of stock options, the Company’s policy is to issue new shares from its authorized but unissued balance of
common stock outstanding that have been reserved for issuance under the Company’s stock option plans.
|
|
Options
|
|
|
Weighted
average
|
|
|
|
Quantity
|
|
|
exercise price
|
|
Options
outstanding as of December 31, 2015
|
|
|
-
|
|
|
$
|
-
|
|
Options
assumed in reverse acquisition
|
|
|
123,500,000
|
|
|
|
0.036
|
|
Options
granted
|
|
|
-
|
|
|
|
-
|
|
Options
exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeitures
|
|
|
-
|
|
|
|
-
|
|
Options
outstanding as of September 30, 2016
|
|
|
123,500,000
|
|
|
$
|
0.036
|
|
NOTE
15 – SUBSEQUENT EVENTS
Senior
Secured Credit Facility Agreement and Convertible Promissory Note
On
September 30, 2016 with an effective date of November 10, 2016 the Company executed a Senior Secured Credit Facility Agreement
(the “Agreement”) by and among: (i) the Company; (ii) BRACE SHOP, LLC, a limited liability company organized under
the laws of the State of Florida, BRACESHOP REAL ESTATE HOLDINGS, LLC, a Florida limited liability company (each individually,
a “Corporate Guarantor” and collectively, the “Corporate Guarantors”); (iii) any Person to hereafter become
a Subsidiary of the Borrower as defined, and any Person that from time to time may hereafter become liable for the Obligations,
or any part thereof, as joint and several guarantors (the “Additional Guarantors”) (the Corporate Guarantors and the
Additional Guarantors, together, jointly and severally, the “Guarantors” and together with the Borrower, the “Credit
Parties”); and (iv) TCA GLOBAL CREDIT MASTER FUND, LP, a limited partnership organized and existing under the laws of the
Cayman Islands, as lender (the “Lender”). The Lender extended a senior secured credit facility to the Company of up
to One Million and No/100 United States Dollars (US$1,000,000.00) for working capital financing for the Company and its Subsidiary,
and for any other purposes permitted.
The
line is joint and severally guaranteed by the subsidiaries of the Company, the Company’s CEO/Director and by the CEO’s
wife, who is a director of the Company. The CEO and his wife have also pledged their equity holdings in the Company and its subsidiaries
and the Company has pledged its equity holdings in the Company’s subsidiaries. Additionally, the line is secured under a
first priority security interest by substantially all assets of the Company and its subsidiaries and the line is subject to negative,
affirmative and financial covenants as defined in the Agreement.
VERITEQ CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(Unaudited)
On
November 10, 2016, the Company issued a convertible promissory note with a principal amount of $750,000 for which the Company
received $315,638 in proceeds net of deferred financing fees of $56,400, a payment made directly to a noteholder of $84,050, a
payment made directly to a line of credit of $281,771 and a payment made directly to paydown state taxes of $12,141. This note
is due on May 10, 2018, eighteen months after the effective date and bears interest at a rate of 18% per annum. At any time while
this Note is outstanding, but only upon: (i) the occurrence of an Event of Default under any of the Loan Documents; or (ii) mutual
agreement between the Borrower and the Holder, the Holder may convert all or any portion of the outstanding principal, accrued
and unpaid interest, Premium, if applicable, and any other sums due and payable hereunder or under any other Loan Documents (such
total amount, the “Conversion Amount”) into shares of Common Stock of the Company (the “Conversion Shares”)
at a price equal to: (i) the Conversion Amount (the numerator); divided by (ii) eighty-five percent (85%) of the lowest of the
daily volume weighted average price of the Borrower’s Common Stock during the five (5) Business Days immediately prior to
the Conversion Date, which price shall be indicated in the conversion notice. This note includes an embedded conversion option
which will be bifurcated and accounted for as a derivative liability at fair value (see Note 2). In connection with this convertible
promissory note the Company entered into an Advisory Services Agreement with the lender dated November 10, 2016 where a range
of advisory services were rendered which may, or may not, have included (i) identifying, evaluating and advising in relation to
the Company's current structural (including business model), financial, operational, managerial, strategic and other needs and
objectives, (ii) preparing and coordinating with the Company and others in the development of business plans, and financial models,
(iii) identifying potential merger, acquisition, divestiture, consolidation or other combination ("M&A Transaction")
opportunities and negotiating, structuring and advising in connection with potential M&A Transactions, (v) advising and assisting
the Company in connection with
the
preparation of any registration statements, periodic or other SEC reports or proxies, and (vi) coordinating with, and advising
in connection with the activities of, Outside Professionals, including without limitation attorneys, accountants, market professionals,
etc. The compensation for these services was $337,500. The management advisory services are fully secured under the loan documents
and have been expensed as professional fees as of November 10, 2016, the period the management advisory services were provided.
The convertible promissory note and the Advisory Service Agreement have the following repayment terms; commencing December 18,
2016 there will be three payments of interest only totaling $11,250; the following fourteen months the Company will repay principal,
interest and $5,000 toward the Advisory Service Agreement totaling monthly payments of $61,208. The eighteenth payment will be
comprised of principal, interest and a balloon payment of $267,500 related to the Advisory Service Agreement.
Loan
Agreement
On
October 1, 2016 (Execution Date) the Company executed a loan agreement with a third party (Lender) the terms of the loan agreement
include issuance of a promissory note dated October 1, 2016 with a principal amount of $42,250, for which the Company proceeds
of $32,500; beginning on the date that is one month following the Execution Date, and continuing on the same calendar day of each
successive month thereafter, the Lender shall invest an amount equal to $12,500, until the Lender has invested an aggregate amount
of $70,000 (the Purchase Price). In return for each subsequent investment the Company shall issue the Lender notes in the
original principal amount of $16,250 per note; beginning on the fifteenth calendar day of the month that is six months following
the Execution Date, and continuing on the same calendar day of each successive month thereafter, the Company shall make payments
in cash to the Lender until a total of $91,000 has been paid to the Lender, the amount of each cash repayment shall be equal to
50% of the Company's net profit earned in the month prior to the month of the applicable cash payment. Net profit shall
be defined as net revenue minus cost of goods sold and marketing expenses less $73,000. As of the date of this report the
November 1, 2016 and December 1, 2016 loans have not been received by the Company.
SNC
Assets
The
SNC Note (see note 4) 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.
In November 2016 the Company returned the SNC Collateral to the holder of the SNC Note, but the holder has not yet accepted such
collateral and the debt remains outstanding.
In September 2016 the Company amended its Certificate of Incorporation
to amend the authorized common shares to 100 million from 100 billion. This change has been retroactively presented in the
balance sheet.
VERITEQ
CORPORATION AND SUBSIDIARIES