Notes to Consolidated Financial Statements
1. Organization and Summary of Significant Accounting Policies
These consolidated financial statements and notes thereto, include the financial statements of VeriTeQ Corporation (“VC”), 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”), 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.
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. Failure to raise capital 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.
We need to raise additional funds to fund our operations till we begin to ship our products 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 December 31, 2013, we are hopeful that we will be able to generate enough cash from capital raises, business operations as we begin to ship our products, additional issuances of promissory notes to related parties and others and through other investing and financing sources as well as from our ability to delay certain salary and bonus payments to senior management until funds are available and 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 December 31, 2014. In November 2013, we entered into a $1,816,667 convertible debt financing as more fully described in Note 5, which matures on November 13, 2014. Under the terms of the financing, $750,000 of the proceeds were required to be placed in restricted bank accounts. In addition, $132,500 of proceeds from the sale of marketable securities that we sold under the terms of a securities purchase agreement with one of the investors was required to be placed in the restricted accounts. Thus, the restricted funds totalled $0.9 million at December 31, 2013. Per the terms of the financing, the restricted funds were to be applied to pay any redemption or other payments due under the applicable note to the applicable holder from time to time with a portion of the restricted funds to be released to us upon any conversion of the notes or at any time the balance of the funds placed in the restricted accounts by the note holders exceeds the principal of the applicable note then outstanding. However, to provide the Company with additional liquidity, on April 3, 2014, certain investors allowed the transfer of approximately $145,000 of the restricted funds to our operating account.
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 have the funds held in the restrictive bank accounts released to us, 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.
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 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”).
In addition, all outstanding stock options to purchase shares of VAC’s common stock, whether or not exercisable or vested, converted into options to acquire shares of VC’s common stock (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 .19083. The exchange ratio took into consideration the Reverse Stock Split, which is more fully discussed below.
VERITEQ CORPORATION AND SUBSIDIARIES
(formerly known as Digital Angel Corporation)
(A Development Stage Company)
Notes to Consolidated Financial Statements, cont.
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 Annual Report has been restated to reflect the Reverse Stock Split as if it had occurred at the beginning of the periods presented, where appropriate.
In connection with the Share Exchange, Digital Angel Corporation changed its name to VeriTeQ Corporation effective October 18, 2013.
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.
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 of revenue, has incurred expenses and has sustained losses. Consequently, its operations are subject to all the risks inherent in the establishment of a new business enterprise. For the period from December 14, 2011 (Inception) through December 31, 2013, the Company has accumulated losses of approximately $17 million.
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.
VERITEQ CORPORATION AND SUBSIDIARIES
(formerly known as Digital Angel Corporation)
(A Development Stage Company)
Notes to Consolidated Financial Statements, cont.
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, 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 year ended December 31, 2013. 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.
Inventory
Inventory consisted of purchased finished goods at December 31, 2013. We did not have inventory on hand at December 31, 2012. 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 years ended December 31, 2013 and 2012 was approximately $1,000 and nil, respectively.
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 2 and 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 December 31, 2013.
Stock-Based Compensation
At December 31, 2013, we had five stock-based employee compensation plans which are described more fully in Note 7. In accordance with the Compensation – Stock Compensation Topic of the Codification, awards granted are valued at fair value and compensation cost is recognized on a straight line basis over the service period of each award.
Income Taxes
We recognize of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statement or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Temporary differences between taxable income reported for financial reporting purposes and income tax purposes consist primarily of timing differences such as amortization of intangible assets, deferred officers' compensation and stock-based compensation. A valuation allowance is provided against net deferred tax assets where we determine realization is not currently judged to be more likely than not. We recognize and measure uncertain tax positions through a two-step process. 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.
VERITEQ CORPORATION AND SUBSIDIARIES
(formerly known as Digital Angel Corporation)
(A Development Stage Company)
Notes to Consolidated Financial Statements, cont.
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. Dilutive common shares consist of incremental shares issuable upon exercise of stock options, warrants and convertible notes payable to the extent that the average fair value of our common stock for each period is greater than the exercise/conversion price of the derivative securities.
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 February 2013, the FASB issued ASU 2013-02,
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
, an amendment to FASB ASC Topic 220. The update requires disclosure of amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present either on the face of the statement of operations or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. For amounts not reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures that provide additional detail about those amounts. This ASU was effective prospectively for our fiscal years, and interim periods within those years beginning after December 15, 2012. The adoption of this did not have a material impact on our financial statements.
In July 2013, ASU ("2013-11"), Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists - a consensus of the FASB Emerging Issues Task Force, was issued to eliminate diversity in practice. ASU 2013-11 requires that companies net their unrecognized tax benefits against all same-jurisdiction net operating losses or tax credit carryforwards that would be used to settle the position with a tax authority. This new guidance is effective prospectively for annual reporting periods beginning on or after December 15, 2013 and interim periods therein. The adoption of ASU 2013-11 will not have a material effect on our consolidated financial statements because it aligns with our historical presentation.
2. Acquisitions
Acquisition
|
|
Dates
Acquired
|
|
Acquisition
Price
|
|
|
Intangible
Assets
Acquired
|
|
Description of Assets
|
(in thousands)
|
PositiveID Animal Health Corporation
|
|
1/11/12
|
|
$
|
1,200
|
|
|
$
|
2,000
|
|
Implantable RFID medical device technologies
|
Bio Sensor patents from PSID
|
|
8/28/12
|
|
|
—
|
|
|
|
—
|
|
Assignment of bio sensor patents
|
Asset Purchase Agreement from SNC Holding Corp.
|
|
12/3/12
|
|
$
|
5,820
|
|
|
$
|
5,820
|
|
Radiation dose monitoring technology for healthcare industry
|
VeriTeQ Corporation
|
|
7/08/13
|
|
$
|
935
|
|
|
$
|
—
|
|
Cash, marketable securities and receivables, among others
|
VERITEQ CORPORATION AND SUBSIDIARIES
(formerly known as Digital Angel Corporation)
(A Development Stage Company)
Notes to Consolidated Financial Statements, cont.
PositiveID Animal Health Corporation acquired by VeriTeQ Acquisition Corporation
On January 11, 2012, VAC entered into a stock purchase agreement with PSID to acquire the outstanding stock of PSID’s wholly-owned subsidiary, PositiveID Animal Health Corporation (“PAH”). Our chairman and chief executive officer is the former chairman and chief executive officer of PSID. In addition, the current chairman and chief executive officer of PSID was a member of our board of directors until July 8, 2013.
Under the terms of the stock purchase agreement, VAC: (i) exchanged 0.8 million shares of its common stock, valued at approximately $0.3 million for the 5.0 million shares of outstanding stock of PAH; (ii) assumed the obligations under outstanding common stock options to acquire 6.9 million shares of PAH, which it converted into stock options to acquire 6.9 million shares of VAC’s common stock and on October 18, 2013, converted into approximately 1.3 million shares of VC’s common stock; (iii) issued a promissory note payable to PSID in the principal amount of $0.2 million with a stated interest rate of 5% per annum (the “PSID Note”); (iv) assumed obligations under an existing development and supply agreement ; and (v) agreed to make royalty payments to PSID as more fully discussed below. VAC recorded a discount on the PSID Note of $60 thousand using a discount rate of approximately 11.9%. The stock options assumed, which have an exercise price of $0.05 per share, after conversion into VC stock, were valued at $0.5 million based on the BSM valuation model using the following assumptions: expected term of 8.2 years, expected volatility of 126%, risk-free interest rate of 1.50%, and expected dividend yield of 0%.
In connection with the acquisition, VAC entered into a license agreement with PSID (the “Original License Agreement”) which granted it a non-exclusive, perpetual, non-transferable, license to utilize PSID’s bio sensor implantable radio frequency identification (RFID) device that is protected under United States Patent No. 7,125,382, “Embedded Bio Sensor System” (the “Patent”) for the purpose of designing and constructing, using, selling and offering to sell products or services related to its business, but excluding the GlucoChip or any product or application involving blood glucose detection or diabetes management. Pursuant to the Original License Agreement, PSID was to receive royalties in the amount of 10% on all gross revenues arising out of or relating to VAC’s sale of products, whether by license or otherwise, specifically relating to the Patent, and a royalty of 20% on gross revenues that are generated under a development and supply agreement between PSID and Medical Components, Inc. (“Medcomp”) dated April 2, 2009. The total cumulative royalty payments under the agreement with Medcomp will not exceed $0.6 million.
On June 26, 2012, the Original License Agreement was amended pursuant to which the license was converted from a non-exclusive license to an exclusive license, subject to VAC meeting certain minimum royalty requirements, which were amended during 2013 as more fully discussed in Note 10.
The total purchase price of PAH was allocated as follows (in thousands):
Intangible Assets:
|
|
|
|
|
Technology
|
|
$
|
1,500
|
|
Customer relationship
|
|
|
500
|
|
Deferred tax liability
|
|
|
(800
|
)
|
Net
|
|
$
|
1,200
|
|
VAC paid for this acquisition as follows:
4.0 million shares of common stock issued and assumption of PAH options
|
|
$
|
760
|
|
Estimated royalty obligations
|
|
|
300
|
|
Promissory note, net
|
|
|
140
|
|
|
|
$
|
1,200
|
|
Based on our estimates of the amount of royalty payments that we expect to pay under the MedComp agreement at the date of acquisition, we have accrued $0.3 million.
In determining the purchase price for PAH, VAC considered various factors including: (i) projected revenue streams from the assets acquired; (ii) the potential revenue stream from the existing customer relationship; and (iii) the opportunity for expanded research and development of the product offerings and the potential for new product offerings.
PAH had no business operations or process prior to the acquisition, and, accordingly, the acquisition was treated as an acquisition of assets and unaudited pro forma results of operations for the year ended December 31, 2012 is not presented. The assets acquired and consideration paid are recorded at their fair value on the date of the acquisition.
See Note 10 for a discussion of a shared services agreement between VAC and PSID.
VERITEQ CORPORATION AND SUBSIDIARIES
(formerly known as Digital Angel Corporation)
(A Development Stage Company)
Notes to Consolidated Financial Statements, cont.
Bio Sensor Patents acquired by VeriTeQ Acquisition Corporation
On August 28, 2012, VAC entered into an Asset Purchase Agreement (the “APA”) with PSID, whereby it purchased all of the intellectual property, including patents and patents pending, related to the PSID’s embedded bio sensor portfolio of intellectual property. Under the APA, PSID is to receive royalties in the amount of ten percent (10%) on all gross revenues arising out of or relating to VAC’s sale of products, whether by license or otherwise, specifically relating to the embedded bio sensor intellectual property, to be calculated quarterly with royalty payments due within 30 days of each quarter end. Minimum royalty requirements, which were to begin in 2013 and thereafter through the remaining life of any of the patents and patents pending, were identical to the minimum royalties due under the Original License Agreement, as amended.
Simultaneously with the APA, VAC entered into a license agreement with PSID granting PSID an exclusive, perpetual, transferable, worldwide and royalty-free license to the patent and patents pending that are a component of the GlucoChip in the fields of blood glucose monitoring and diabetes management. In connection with the APA, the Original License Agreement, as amended June 26, 2012, was terminated. Also on August 28, 2012, the PSID Security Agreement was amended, pursuant to which the assets sold by PSID to VAC under the APA and the related royalty payments were added as collateral under the PSID Security Agreement. We had no plans to develop or commercialize the Bio Sensor patents, and therefore, no value was ascribed to these patents. Further, we are not aware of a buyer or licensor for these patents.
On July 8, 2013, we entered into a letter agreement with PSID, which modified the terms of the royalty payments due to PSID under the APA, and on November 8, 2013, we amended the July 8, 2013 letter agreement, as more fully discussed in Note 10.
VeriTeQ Acquisition Corporation Asset Purchase Agreement with SNC Holding Corp.
In December 2012, VAC entered into an asset purchase agreement and a royalty agreement with SNC Holding Corp. wherein VAC acquired various technology and trademarks related to its radiation dose measurement technology. Under the terms of the agreements, VAC issued a non-interest bearing secured subordinated convertible promissory note, in the principal amount of $3.3 million and agreed to make royalty payments based on a percentage of revenue earned from the technology acquired. In addition, under the terms of sublicense agreement related to the technology, VAC made a $20 thousand sublicense payment in February 2013 and agreed to make minimum sublicense payments aggregating $0.2 million over the period from June 2014 to March 2017. The promissory note is convertible into one-third of the beneficial stock ownership of VC held by our CEO, or approximately 2.2 million shares at December 31, 2013. The promissory note was recorded at its initial estimated fair value of approximately $2.1 million and is being re-valued at each reporting period with changes in the fair value recorded as other expense/income (see Notes 5 and 6 for a further discussion of the current fair value of the promissory note). The total purchase price, including estimated royalty obligations of $3.7 million, was approximately $5.8 million. In connection with the asset purchase agreement with SNC Holding Corp., VAC entered into a security agreement whereby certain intellectual property purchased thereunder, including intellectual property related to its dosimeter products, would revert to SNC Holding Corp. in the event of: (i) a default under the promissory note; (ii) failure to pay the minimum royalty obligations; (iii) failure to perform its obligations with respect to commercializing the intellectual property acquired; or (iv) the occurrence of an unauthorized issuance of VTQ IP Holding Corporation’s capital stock. The unamortized balance of the intellectual property related to our dosimeter products was $5.4 million as of December 31, 2013.
The total purchase price of the assets acquired was allocated as follows (in thousands):
Intangible Assets:
|
|
|
|
|
Technology
|
|
$
|
5,370
|
|
Trademarks
|
|
|
450
|
|
Total
|
|
$
|
5,820
|
|
VAC paid for this acquisition as follows:
Estimated royalty obligations
|
|
$
|
3,700
|
|
Note at fair value
|
|
|
2,100
|
|
Assumption of liabilities
|
|
|
20
|
|
Total
|
|
$
|
5,820
|
|
The estimated fair value of the acquired intangible assets as presented above were determined using discounted cash flow methodology as more fully discussed in Note 3. The assets acquired and the consideration paid is recorded at their fair value on the date of acquisition.
VERITEQ CORPORATION AND SUBSIDIARIES
(formerly known as Digital Angel Corporation)
(A Development Stage Company)
Notes to Consolidated Financial Statements, cont.
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, the accompanying unaudited condensed consolidated financial statements reflect VC’s assets and liabilities at fair value to the extent they are deemed to have been acquired for accounting purposes and VC has established a new basis for its assets and liabilities based upon the fair values thereof and the value of VC’s shares outstanding on July 8, 2013, the closing date. The value of VC’s common stock was calculated based on the closing price of VC’s common stock on July 8, 2013, which was $0.90 per share on a post reverse stock split basis. The value of VC’s outstanding stock options was based on the closing price of VC’s common stock on July 8, 2013 and using the BSM valuation model using the following assumptions: expected term of 2.6 years, expected volatility of 106.6 %, risk-free interest rate of 0.62%, and expected dividend yield of 0%
In addition, the Exchange Agreement created a new measurement date for the valuation of the options to acquire shares of VAC’s common stock, which were converted into options to acquire shares of VC’s common stock. The new measurement date was the closing date of the transaction which was July 8, 2013. This new measurement did not result in a non-cash compensation charge because the value of the modified options did not exceed the value of the options before the modification.
Total Purchase Price was calculated as follows (in thousands, except per share amount):
Value of VC’s common stock outstanding on July 8, 2013 (1,029 shares @ $.90 per share)
|
|
$
|
926
|
|
Value of VC’s stock options outstanding on July 8, 2013
|
|
|
9
|
|
Total
|
|
$
|
935
|
|
The total purchase price of the VC assets acquired and liabilities assumed was allocated was follows (in thousands):
Assets purchased:
|
|
|
|
|
Cash
|
|
$
|
818
|
|
Marketable securities
|
|
|
239
|
|
Current portion of other receivable
|
|
|
168
|
|
Prepaid and other assets
|
|
|
47
|
|
Fixed assets
|
|
|
1
|
|
Other assets
|
|
|
60
|
|
Total
|
|
$
|
1,333
|
|
Liabilities assumed:
|
|
|
|
|
Accounts payable
|
|
$
|
72
|
|
Accrued expenses
|
|
|
326
|
|
Total
|
|
$
|
398
|
|
|
|
|
|
|
Net Assets Acquired
|
|
$
|
935
|
|
Included in the selling, general and administrative expenses for the year ended December 31, 2013 is $0.4 million of expenses related to the VeriTeQ transaction.
The results of VC have been included in the consolidated statement of operations since July 8, 2013, the date of acquisition. Unaudited pro forma results of operations for the years ended December 31, 2013 and 2012 are included below. Such pro forma information assumes that the VC acquisition had occurred as of January 1, 2012. This summary is not necessarily indicative of what our result of operations would have been had VC been a combined entity during such periods, nor does it purport to represent results of operations for any future periods.
(In thousands, except per share amounts)
|
|
Year
Ended December 31, 2013
|
|
|
Year
Ended December 31, 2012
|
|
Net operating revenue
|
|
$
|
18
|
|
|
$
|
—
|
|
Net loss
|
|
$
|
(15,453
|
)
|
|
$
|
(3,958
|
)
|
Net loss per common share – basic and diluted
|
|
$
|
(1.69
|
)
|
|
$
|
(0.52
|
)
|
VERITEQ CORPORATION AND SUBSIDIARIES
(formerly known as Digital Angel Corporation)
(A Development Stage Company)
Notes to Consolidated Financial Statements, cont.
3. Intangible Assets
Intangibles and other assets consist of the following:
|
|
December 31,
2013
|
|
|
December 31,
2012
|
|
|
Lives
(in years)
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
|
|
|
|
Technology, net of accumulated amortization of $627 and $136
|
|
$
|
6,244
|
|
|
$
|
6,734
|
|
|
|
14
|
|
Customer relationship, net of accumulated amortization of $141 and $69
|
|
|
359
|
|
|
|
431
|
|
|
|
7
|
|
Trademarks, net of accumulated amortization of $35 and $3
|
|
|
415
|
|
|
|
447
|
|
|
|
14
|
|
|
|
$
|
7,018
|
|
|
$
|
7,612
|
|
|
|
|
|
Estimated amortization of intangible assets for the years ending December 31 is as follows (in thousands):
2014
|
|
|
594
|
|
2015
|
|
|
594
|
|
2016
|
|
|
594
|
|
2017
|
|
|
594
|
|
2018
|
|
|
594
|
|
Thereafter
|
|
|
4,048
|
|
|
|
|
|
|
|
|
$
|
7,018
|
|
Amortization of intangibles charged against income amounted to $0.6 million and $0.2 million for the years ended December 31, 2013 and 2012, respectively.
The estimated fair value of the acquired intangible assets of the acquisitions discussed in Note 2 were determined on the basis of patents and other proprietary rights for technologies, contract lives and estimated revenue, customer relationship and other factors related to forecasted results, including revenue growth rates of 55% - 358% and using discounted cash flow methodology using discount rates ranging from 25% to 45%. Under this method, we estimated the cash flows that each of these intangible assets are expected to generate over the course of their expected economic lives. Actual cash flows may differ significantly from these estimates. The expected economic lives of these intangible assets were determined based upon the expected use of the asset, the ability to extend or renew patents and other contractual provisions associated with the asset, the estimated average life of the associated products, the stability of the industry, expected changes in and replacement value of distribution networks, and other factors deemed appropriate.
4. Accrued Expenses
The following table summarizes the significant components of accrued expenses:
|
|
December 31,
2013
|
|
|
December 31,
2012
|
|
|
|
(in thousands)
|
|
Accrued payroll and payroll related
|
|
$
|
1,734
|
|
|
$
|
709
|
|
Accrued legal
|
|
|
445
|
|
|
|
291
|
|
Accrued other expenses
|
|
|
539
|
|
|
|
72
|
|
Total accrued expenses
|
|
$
|
2,718
|
|
|
$
|
1,072
|
|
5. Notes Payable and Restricted Cash
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 $1,816,667 in principal amount of senior secured convertible promissory note, or the 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.
VERITEQ CORPORATION AND SUBSIDIARIES
(formerly known as Digital Angel Corporation)
(A Development Stage Company)
Notes to Consolidated Financial Statements, cont.
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.
In connection with the sale of the Notes and the Warrants, (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”).
Proceeds Received and Restricted Cash
At Closing, we received proceeds, net of $115,000 of the investors 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 will be applied to pay any redemption or other payment due under the applicable note to the applicable holder from time to time. Pursuant to the terms of the financing, a portion of the restricted funds will be released to us upon any conversion of the notes or at any time the balance of the funds placed in the restricted accounts by the note holders exceeds the principal of the applicable note then outstanding. 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 totals approximately $0.9 million at December 31, 2013. On April 3, 2014, certain investors transferred approximately $145,000 of the restricted funds to our operating account as more fully discussed in Note 14.
The Purchase Agreement provides, among other things, that we will (i) not enter into a variable rate transaction at any time while the Notes are outstanding, and (ii) for a period of two years from the date of the Closing, allow the Investors to participate in the purchase of their respective pro rata portion of no less than 50% of the securities offered by us in any future financing transactions.
Description of the Notes
The Notes will mature on the first anniversary of the Closing. No interest shall accrue on the Notes unless there is an event of default (as defined in the Notes), in which case interest on the Notes shall commence accruing daily at a rate of eighteen percent (18%) per annum.
The Notes may be converted into our common stock, at the option of the holder, at any time following issuance, unless the conversion or share issuance under the conversion would cause the holder to beneficially own in excess of 4.99% of our common stock. The Conversion Price of the Notes is $0.75. If and whenever after the Closing we issue or sell, or are deemed to have issued or sold, any shares of common stock for a consideration per share (the “New Issuance Price”) 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 Conversion Price is subject to adjustment upon the following events:
● if we pay a stock dividend or otherwise make a distribution on any class of capital stock that is payable in shares of common stock;
● if we subdivide (by any stock split, stock dividend, recapitalization or otherwise) one or more classes of our then outstanding shares of common stock into a larger number of shares; or
● if we combine (by combination, reverse stock split or otherwise) one or more classes of our then outstanding shares of common stock into a smaller number of shares.
VERITEQ CORPORATION AND SUBSIDIARIES
(formerly known as Digital Angel Corporation)
(A Development Stage Company)
Notes to Consolidated Financial Statements, cont.
In each such case the Conversion Price will be multiplied by the following fraction: (i) the number of shares of common stock outstanding immediately before such event and (ii) the number of shares of common stock outstanding immediately after such event.
The Notes rank senior to our indebtedness and are secured by a perfected first lien security interest in all of the Company’s and its subsidiaries assets except certain assets of VTQ IP Holding Corporation (IP related to the Company’s dosimeter business) and certain intellectual property assets of PAH (IP related to the Company’s UDI business), which are secured by a second priority lien. The Notes contain certain covenants and restrictions, including, among others, that, for so long as the Notes are outstanding, we will not incur any indebtedness except permitted indebtedness, permit liens on its properties (other than permitted liens under the Notes), make dividends or transfer certain assets.
If we issue options, convertible securities, warrants or similar securities to holders of our common stock, each holder of a Note has the right to acquire the same as if it had converted its Note into common stock.
Description of the Warrants
The Warrants became exercisable at issuance and entitle the Investors to purchase shares of our common stock for a period of five years at an initial exercise price of $2.84 per share. The Exercise Price is subject to adjustment.
VERITEQ CORPORATION AND SUBSIDIARIES
(formerly known as Digital Angel Corporation)
(A Development Stage Company)
Notes to Consolidated Financial Statements, cont.
If we are prohibited from issuing shares of our common stock upon exercise of the Warrants due to our failure to have sufficient authorized shares of common stock we will be required to pay cash for the shares we would be required to issue upon exercise of the Warrants at a price per share equal to the greatest closing sale price of the common stock on any trading day commencing on the date the holder provides the exercise notice and ending on the date of payment multiplied by the number of unavailable shares. If the holder of the Warrants purchased shares to deliver upon sale of the shares underlying the Warrants, we will also have to pay any brokerage commissions and other expenses incurred by the holder.
The Warrants include cashless exercise provisions in the event a registration statement is not effective.
VERITEQ CORPORATION AND SUBSIDIARIES
(formerly known as Digital Angel Corporation)
(A Development Stage Company)
Notes to Consolidated Financial Statements, cont.
Lock-Up Agreements
As a condition to the sale of the securities, the Company's executive officers, management and directors entered into lock-up agreements pursuant to which they agreed not to sell, pledge, hypothecate or otherwise transfer their shares for a period of 12 months commencing on the date of the Closing, subject to certain exceptions for estate planning and similar purposes.
Notes payable and long-term debt consists of the following (in thousands):
|
|
December 31,
2013
|
|
|
December 31,
2012
|
|
|
|
(in thousands)
|
|
PSID Note for $200 dated January 11, 2012, bears interest at 5% per annum, net of discount of $0 and $43 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. The Company issued 300 warrants to PSID in connection with a letter agreement entered into in November 2013(2)(3)
|
|
$
|
175
|
|
|
$
|
157
|
|
Convertible term note for $125 issued September 25, 2012 net of discount of $31, bears interest at 10% per annum, is convertible into shares of common stock at $1.57 per share and matures on March 31, 2013. Note was issued with warrants to acquire 40 shares of common stock with an exercise price of $1.57 per share. Note was converted into common stock in March 2013. An additional 40 warrants with an exercise price of $1.57 per share were granted in March 2013 as an inducement to the conversion.(2)
|
|
|
—
|
|
|
|
94
|
|
Convertible term note for $125 issued October 12, 2012, net of discount of $39, bears interest at 10% per annum, is convertible into shares of common stock at $1.57 per shares and matures April 10, 2013. Note was issued with warrants to acquire 40 shares of common stock with an exercise price of $1.57 per share. Note was converted into common stock in June 2013. An additional 40 warrants with an exercise price of $1.57 per share were granted in June 2013 as an inducement to the conversion.(1)(2)
|
|
|
—
|
|
|
|
86
|
|
Convertible term note for $100 issued December 31, 2012, net of discount of $55, bears interest at 10% per annum, is convertible into shares of common stock at $1.57 per share and matures June 30, 2013. Note was issued with warrants to acquire 29 shares of common stock with an exercise price of $1.57 per share. Note was converted into common stock in June 2013. An additional 29 warrants with an exercise price of $1.57 per share were granted in June 2013 as an inducement to the conversion.(1) (2)
|
|
|
—
|
|
|
|
45
|
|
Convertible term note for $50 issued December 31, 2012, net of discount of $28, bears interest at 10% per annum, is convertible into shares of common stock at $1.57 per shares and matures June 30, 2013. Note was issued with warrants to acquire 14 shares of common stock with an exercise price of $1.57 per share. Note was converted into common stock in June 2013. An additional 14 warrants with an exercise price of $1.57 per share were granted in June 2013 as an inducement to the conversion.(1) (2)
|
|
|
—
|
|
|
|
22
|
|
Demand note for $80 issued October 11, 2013 to CEO, bears interest at 5% per annum, partially repaid in November 2013(1)
|
|
|
30
|
|
|
|
—
|
|
Demand note for $30 issued October 29, 2013 to CEO, bears interest at 5% per annum(1)
|
|
|
30
|
|
|
|
—
|
|
Senior Secured Convertible Notes issued November 13, 2013 for $1,817, net of discount of $1,585, to group of institutional investors, are convertible into shares of common stock at $0.75 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 (2)
|
|
|
232
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Total notes payable
|
|
|
467
|
|
|
|
404
|
|
Less: Current maturities
|
|
|
467
|
|
|
|
326
|
|
|
|
|
|
|
|
|
|
|
Note payable long-term
|
|
$
|
—
|
|
|
$
|
78
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
$
|
4,925
|
|
|
$
|
2,137
|
|
(1) These notes have been issued to related parties. For additional discussion, 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 for additional discussion.
VERITEQ CORPORATION AND SUBSIDIARIES
(formerly known as Digital Angel Corporation)
(A Development Stage Company)
Notes to Consolidated Financial Statements, cont.
The scheduled payments due based on maturities of current and long-term debt and at December 31, 2013 are presented in the following table:
Year:
|
|
Amount
|
|
|
|
(in thousands)
|
|
2014
|
|
|
1,877
|
(1)
|
2015
|
|
|
3,300
|
|
|
|
|
|
|
Total payments
|
|
$
|
5,177
|
|
|
(1)
|
The PSID Note, which has been assigned to various investors, is only convertible into stock and, thus, is not included in the scheduled payments due in 2014 in the table above.
|
Interest expense was approximately $4.3 million for the year ended December 31, 2013. This includes approximately $3.4 million for the value of warrants issued in connection with debt, including $0.4 million associated with the warrants issued as a placement agent fee, approximately $0.4 million of debt issue costs, which were expensed as incurred, approximately $0.3 million of debt discount accretion and approximately $0.1 million for shares issued to as an inducement to convert notes during 2013.
Interest expense was $0.1 million during the year ended December 31, 2012 of which approximately $31 thousand related to the accretion of beneficial conversion feature of the convertible notes. We did not incur any interest expense from December 14, 2011 (inception) to December 31, 2011.
Given the significant amount of non-cash interest expense associated with the value of the warrants issued in connection with debt, the weighted average effective interest rate for the year ended December 31, 2013 is not a meaningful number. The weighted average effective interest rate was 37.62% for the year ended December 31, 2012.
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.
VERITEQ CORPORATION AND SUBSIDIARIES
(formerly known as Digital Angel Corporation)
(A Development Stage Company)
Notes to Consolidated Financial Statements, cont.
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 year end December 31, 2013, we had a short-term investment (marketable securities), which we valued using Level 1 inputs. The marketable securities were sold in November 2013. During the year ended December 31, 2013, the subordinated convertible note issued to SNC Holdings Corp., which has a convertible option embedded in the note, warrant liabilities and the estimated royalty obligations were valued using Level 3 inputs, and for the year ended December 31, 2012, the note issued to SNC Holdings Corp. and the royalty obligations were valued using Level 3 inputs. The changes in fair value of the subordinated convertible note and the warrant liability during 2013 are reflected in other expense for 2013. There was no change in the estimated fair value of the royalty obligations.
Notes Payable and Long-Term Debt
The carrying amount approximates fair value based on management’s estimate of the applied discount rates and fair value adjustments. The subordinated convertible note with an embedded conversion option was discounted at 22.8% at December 31, 2012. Subsequently, we have valued the subordinate convertible note based on the market value of the shares of our common stock into which it is convertible at each period end.
Warrant Liabilities
The carrying amounts approximate management’s estimate of the fair value of the warrant liabilities at December 31, 2013 based on the BSM valuation model and using the following assumptions: expected term of 4.87 years, expected volatility of 155%, risk-free interest rates of 1.75%, and expected dividend yield of 0%.
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 December 31, 2013 and December 31, 2012 (in thousands):
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated convertible note with an embedded conversion option
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,925
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,137
|
|
Warrant liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,114
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Royalty obligations
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,000
|
|
The following is a summary of activity of Level 3 liabilities for the year ended December 31, 2013:
|
|
Subordinated
Note with
Convertible
Option
|
|
|
Warrant
Liabilities
|
|
|
Estimated
Royalty
Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012
|
|
$
|
2,137
|
|
|
$
|
—
|
|
|
$
|
4,000
|
|
Issuances of warrants accounted for as liabilities
|
|
|
—
|
|
|
|
5,394
|
|
|
|
—
|
|
Change in fair value
|
|
|
2,788
|
|
|
|
720
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2013
|
|
$
|
4,925
|
|
|
$
|
6,114
|
|
|
$
|
4,000
|
**
|
** Includes $60 thousand of current royalty obligations included in accrued expenses at December 31, 2013.
VERITEQ CORPORATION AND SUBSIDIARIES
(formerly known as Digital Angel Corporation)
(A Development Stage Company)
Notes to Consolidated Financial Statements, cont.
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.
7. Stockholders’ Deficit
Preferred Stock
On June 24, 2013, VAC and its stockholders entered in the Exchange Agreement with VC and on July 8, 2013, the transaction closed. 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 Preferred Stock. On July 10, 2013, VC realized that it incorrectly issued the Series B Preferred Stock and as result, on July 12, 2013, it exchanged the Series B Preferred Stock for 410,759 shares of its newly created Series C 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 converted 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 on October 18, 2013.
The Series C Preferred Stock consists of 500,000 authorized shares. 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)
|
have the same voting rights as holders of VC’s common stock on an as-converted basis for any matters that are subject to stockholder vote;
|
(c)
|
are not entitled to any dividends; and
|
(d)
|
are to be treated pari passu with the common stock on liquidation, dissolution or winding up of VC.
|
Common Stock
In July 2013, we issued 41,667 shares of our common stock to an investment advisory firm for services rendered for an aggregate value of $62,500. The shares were valued at the fair market value of the stock on the date of issuance which was $1.50 per share.
On October 18, 2013, VC filed a Certificate of Amendment to its Certificate of Incorporation (the “Certificate of Amendment”) with the Secretary of State of the State of Delaware effecting a one-for-thirty reverse stock split of its common stock (the “Reverse Stock Split”) and a name change to VeriTeQ Corporation. The reverse stock split became effective on October 18, 2013, and every thirty (30) shares of VC's issued and outstanding common stock were automatically converted into one (1) issued and outstanding share of VC's common stock, without any change in the par value per share. The Certificate of Amendment provides that no fractional shares will be issued. Stockholders of record who otherwise would be entitled to receive fractional shares will receive, in lieu thereof, a cash payment based on the volume weighted average price of the Company's common stock as reported on October 21, 2013 on the OTC Markets. All shares and options amounts have been adjusted accordingly for all periods presented in the Annual Report.
Pursuant to the terms of a July 8, 2013 letter agreement between PSID and the Company, we agreed to issue shares of our common stock as repayment of the PSID Note. Accordingly, in October 2013, we issued approximately 16,666 shares of common stock in connection with a partial repayment of the PSID Note, and we agreed to issue an additional 135,793 shares of our common stock in full repayment of the PSID Note. These share issued by us to PSID in October 2013 were issued in private placement in reliance upon the exemption from the registration requirements set forth in the Act provided for in Section 4(2) of the Securities Act, and Rule 506 of Regulation D promulgated by the SEC thereunder. In connection with the November 13, 2013 financing described in Note 5, PSID assigned the PSID Note to certain investors.
In October and November 2013, we issued 163,333 shares of common stock to three investor relation firms for services rendered for an aggregate value of approximately $0.4 million. The shares were valued at the fair market value of the stock on the dates of issuance which were $2.70, $2.10 and $2.00.
VERITEQ CORPORATION AND SUBSIDIARIES
(formerly known as Digital Angel Corporation)
(A Development Stage Company)
Notes to Consolidated Financial Statements, cont.
At December 31, 2013, VC had authorized 50.0 million shares of common stock of which approximately 9.5 million were issued and outstanding. Of the 9.5 million issued and outstanding shares of common stock at December 31, 2013, 5.7 million were beneficially owned by our Chief Executive Officer.
Warrants
We have issued warrants exercisable for shares of common stock for consideration, as follows (in thousands, except exercise price):
Series/ Issue Date
|
|
Warrants
Authorized
|
|
|
Warrants
Issued
|
|
|
Exercised/
Forfeited
|
|
|
Balance
December 31,
2013
|
|
|
Exercise
Price
|
|
|
Exercisable
Period
(years)
|
|
Series A /June 2012
|
|
|
95
|
|
|
|
95
|
|
|
|
—
|
|
|
|
95
|
|
|
$
|
0.37
|
|
|
|
3
|
|
Series B / September 2012
|
|
|
40
|
|
|
|
40
|
|
|
|
—
|
|
|
|
40
|
|
|
$
|
1.57
|
|
|
|
3
|
|
Series C / October 2012
|
|
|
40
|
|
|
|
40
|
|
|
|
—
|
|
|
|
40
|
|
|
$
|
1.57
|
|
|
|
3
|
|
Series D / December 2012
|
|
|
14
|
|
|
|
14
|
|
|
|
—
|
|
|
|
14
|
|
|
$
|
1.57
|
|
|
|
5
|
|
Series E /December 2012
|
|
|
29
|
|
|
|
29
|
|
|
|
—
|
|
|
|
29
|
|
|
$
|
1.57
|
|
|
|
5
|
|
Series F / March 2013
|
|
|
40
|
|
|
|
40
|
|
|
|
—
|
|
|
|
40
|
|
|
$
|
1.57
|
|
|
|
3
|
|
Series G / April 2013
|
|
|
95
|
|
|
|
95
|
|
|
|
—
|
|
|
|
95
|
|
|
$
|
1.31
|
|
|
|
3
|
|
Series H / June 2013
|
|
|
83
|
|
|
|
83
|
|
|
|
—
|
|
|
|
83
|
|
|
$
|
1.57
|
|
|
|
3
|
|
Series VT a/ November 2013
|
|
|
2,644
|
|
|
|
2,644
|
|
|
|
—
|
|
|
|
2,644
|
|
|
$
|
2.84
|
|
|
|
5
|
|
Series VT b/ November 2013
|
|
|
300
|
|
|
|
300
|
|
|
|
—
|
|
|
|
300
|
|
|
$
|
2.84
|
|
|
|
5
|
|
|
|
|
3,380
|
|
|
|
3,380
|
|
|
|
—
|
|
|
|
3,380
|
|
|
|
|
|
|
|
|
|
The Series A warrants were issued in connection with a stock subscription agreement to an investor. The Series A warrants are exercisable at any time during the exercisable periods. The Series A warrant agreement provides for the number of shares to be adjusted in the event of a stock split, a reverse stock split, a share exchange or other conversion or exchange event in which case the number of warrants and the exercise price of the warrants shall be adjusted on a proportional basis.
The Series B, C, D, E, F, G and H warrants were issued in connection with promissory notes. The promissory note issued in April 2013 in connection with the series G warrants was repaid during 2013. The promissory notes issued in connection with the series B,C,D, E, F and H warrants are more fully described in Note 5. These warrants are exercisable at any time during the exercisable periods. The warrant agreements provide for the number of shares to be adjusted in the event of a stock split, a reverse stock split, a share exchange or other conversion or exchange event in which case the number of warrants and the exercise price of the warrants shall be adjusted on a proportional basis. The total value of these warrants of approximately $0.3 million was amortized to interest expense over the life of the promissory notes and accordingly, we recorded approximately $0.3 million and $31 thousand of non-cash interest expense related to these warrants during the years ended December 31, 2013 and 2012, respectively.
The Series VTa warrants were issued on November 13, 2013 in connection with senior secured convertible notes, which are more fully described in Note 5. These warrants are exercisable at any time during the exercisable periods. The warrant agreements provide for the number of shares to be adjusted in the event of a stock split, a reverse stock split, a share exchange or other conversion or exchange event in which case the number of warrants and the exercise price of the warrants shall be adjusted
on a proportional basis. In addition, if we issue or sell any shares of our common stock, except certain specified issuances pursuant to the Company’s stock plans or the issuance of common stock pursuant to agreements existing on November 13, 2013, at a price per share, or the New Exercise Price, less than the Exercise Price in effect immediately before the issuance or sale, then immediately after such dilutive issuance, the Exercise Price will be reduced to the New Exercise Price. If there is an adjustment to the Exercise Price as a result of any of the dilution events specified in the Warrant agreements, the number of shares of common stock that may be purchased upon exercise of the Warrant will be increased or decreased proportionately, so that after such adjustment the aggregate Exercise Price payable for the adjusted number of shares shall be the same as the aggregate Exercise Price in effect immediately prior to such adjustment (without regard to any limitations on exercise).
The Series VTb warrants were issued November 13, 2013 to PSID in connection with a letter agreement between the Company and PSID as more fully discussed in Note 10. The terms of the Series VTb warrants are identical to the Series VTa warrants.
VERITEQ CORPORATION AND SUBSIDIARIES
(formerly known as Digital Angel Corporation)
(A Development Stage Company)
Notes to Consolidated Financial Statements, cont.
We determined the value of the warrants issued in 2012 and 2013 on the issuance dates utilizing the following assumptions in the BSM valuation model:
Warrants Issued
|
|
Dividend
Yield
|
|
|
Volatility
|
|
|
Expected
Lives (Yrs.)
|
|
|
Risk-Free
Rate
|
|
|
Date of the
Assumptions
|
June 2012
|
|
|
0.00
|
%
|
|
|
126.00
|
%
|
|
|
3
|
|
|
|
.34
|
%
|
|
June 1, 2012
|
September 2012
|
|
|
0.00
|
%
|
|
|
126.00
|
%
|
|
|
3
|
|
|
|
.35
|
%
|
|
September 25, 2012
|
October 2012
|
|
|
0.00
|
%
|
|
|
126.00
|
%
|
|
|
3
|
|
|
|
.35
|
%
|
|
October 12, 2012
|
December 2012
|
|
|
0.00
|
%
|
|
|
126.00
|
%
|
|
|
5
|
|
|
|
.72
|
%
|
|
December 31, 2012
|
March 2013
|
|
|
0.00
|
%
|
|
|
126.00
|
%
|
|
|
3
|
|
|
|
.38
|
%
|
|
March 18, 2013
|
April 2013
|
|
|
0.00
|
%
|
|
|
126.00
|
%
|
|
|
3
|
|
|
|
.34
|
%
|
|
April 10, 2013
|
June 2013
|
|
|
0.00
|
%
|
|
|
126.00
|
%
|
|
|
3
|
|
|
|
.52
|
%
|
|
June 1, 2013
|
November 2013
|
|
|
0.00
|
%
|
|
|
154.00
|
%
|
|
|
5
|
|
|
|
1.41
|
%
|
|
November 13, 2013
|
Stock Option Activity
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. 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 our stock option plans. A summary of the status of our stock options as of December 31, 2013, and changes during the two years then ended, is presented below.
During 1999, we adopted the 1999 Flexible Stock Plan and the 1999 Employees’ Stock Plan. During 2003, we adopted the 2003 Flexible Stock Plan. The options granted under these plans have contractual terms ranging from six to ten years.
Under the 1999 Flexible Plan, the number of shares authorized to be issued or sold, or for which options, Stock Appreciation Rights (“SARs”), or Performance Shares may be granted to our officers, directors and employees is approximately 15,000. As of December 31, 2013, approximately 14,000 options have been granted, net of forfeitures, approximately 1,700 options are outstanding, and approximately 1,000 shares are available for future issuance. The options vest as determined by our board of directors and are exercisable over a period of five years.
The 1999 Employees’ Stock Purchase Plan authorizes the grant of options to employees who purchase shares of common stock. The number of shares authorized to be issued for which options may be granted is approximately 5,400. As of December 31, 2013, approximately 4,200 options have been granted, 1,100 are outstanding and 1,200 shares are available for grant.
Under the 2003 Flexible Plan, the number of shares authorized to be issued or sold, or for which options, SARs, or performance shares may be granted to our officers, directors and employees is approximately 133,000. As of December 31, 2013, approximately 93,000 options have been granted, net of forfeitures, approximately 29,000 are outstanding and approximately 41,000 shares are available for future issuances. The options vest as determined by our board of directors and are exercisable over a period of three to ten years.
Under the Digital Angel Transition Stock Option Plan, the number of shares authorized to be issued is approximately 61,000. As of December 31, 2013, approximately 40,000 shares have been granted, net of forfeitures, approximately 30,000 are outstanding, and approximately 21,000 remain available for issuance. The options vest as determined by the board of directors, and are exercisable over a period of three to nine years.
On July 12, 2013, pursuant to the Exchange Agreement, a majority of our voting stockholders adopted resolutions by written consent approving the DAC 2013 Stock Incentive Plan (the “Plan”), under which employees, including officers
and directors, and consultants may receive awards. Awards under the Plan include incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock performance units, performance shares, cash awards and other stock based awards. The purposes of the Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to employees and consultants, to promote the success of the Company’s business and to link participants’ directly to stockholder interests through increased stock ownership. The Plan became effective on October 18, 2013, upon effectiveness of the Reverse Stock Split. On October 18, 2013, the outstanding stock options under the three VAC’s stock plans were converted into options to acquire VC’s common stock under the DAC 2013 Stock Plan and VAC’s three former stock plans were terminated.
The aggregate number of shares of the Company’s common stock that may be subject to awards under the Plan, subject to adjustment upon a change in capitalization, is 5,000,000 shares. Such shares of common stock may be authorized, but unissued, or reacquired shares of common stock. Shares of common stock that were subject to Plan awards that expire or become unexercisable without having been exercised in full shall become available for future awards under the Plan. At December 31, 2013, approximately 2.6 million options are outstanding, and approximately $2.4 million options remain available for issuance under this Plan.
VERITEQ CORPORATION AND SUBSIDIARIES
(formerly known as Digital Angel Corporation)
(A Development Stage Company)
Notes to Consolidated Financial Statements, cont.
In addition, as of December 31, 2013, we have granted approximately 4,400 options, net of forfeitures, and have outstanding approximately 4,000 options which were granted outside of the above plans as an inducement to employment.
During the years ended December 31, 2013 and 2012, we granted 1.0 million and 0.5 million options, respectively. The weighted average fair values of the options granted during the years ended December 31, 2013 and 2012 were $1.33 and $0.90, respectively.
We account for our stock-based compensation plans in accordance with ASC 718-10,
Compensation – Stock Compensation
. Under the provisions of ASC 718-10, the fair value of each stock option is estimated on the date of grant using a BSM option-pricing formula, and amortizing that value to expense over the expected performance or service periods using the straight-line attribution method. The weighted average values of the assumptions used to value the options granted in the year ended December 31, 2013 were as follows: expected term of 5 years, expected volatility of 126%, risk-free interest rates of 0.83%, and expected dividend yield of 0%. The weighted average values of the assumptions used to value the options granted in the year ended December 31, 2012 were as follows: expected term of 5 years, expected volatility of 126%, risk-free interest rates of 0.67%, and expected dividend yield of 0%. The expected life represents an estimate of the weighted average period of time that options are expected to remain outstanding given consideration to vesting schedules and the Company’s historical exercise patterns. Expected volatility is estimated based on the historical volatility of similar companies’ common stock. The risk free interest rate is estimated based on the U.S. Federal Reserve’s historical data for the maturity of nominal treasury instruments that corresponds to the expected term of the option. The expected dividend yield is 0% based on the fact that we have never paid dividends and have no present intention to pay dividends.
During the years ended December 31, 2013 and 2012, we recorded $1.4 million and $0.4 million, respectively, in compensation expense related to stock options granted to our directors, employees and consultants (who provide corporate support services).
A summary of the stock option activity for our stock options plans for 2013 and 2012 is as follows (shares in thousands):
|
|
2013
|
|
|
2012
|
|
|
|
Number
of Options
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Number
of Options
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding on January 1
|
|
|
1,531
|
|
|
$
|
0.31
|
|
|
|
—
|
|
|
$
|
—
|
|
Granted
|
|
|
1,050
|
|
|
|
1.57
|
|
|
|
458
|
|
|
|
1.05
|
|
Assumed in PAH acquisition
|
|
|
—
|
|
|
|
—
|
|
|
|
1,307
|
|
|
|
0.05
|
|
Assumed in VC acquisition
|
|
|
75
|
|
|
|
344.15
|
|
|
|
—
|
|
|
|
—
|
|
Forfeited or expired
|
|
|
(28
|
)
|
|
|
151.64
|
|
|
|
(234
|
)
|
|
|
0.31
|
|
Outstanding at December 31
|
|
|
2,628
|
|
|
|
9.01
|
|
|
|
1,531
|
|
|
|
0.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31
(1)
|
|
|
1,579
|
|
|
|
13.95
|
|
|
|
1,264
|
|
|
|
0.05
|
|
Vested or expected to vest at December 31
(2)
|
|
|
2,628
|
|
|
|
9.01
|
|
|
|
1,531
|
|
|
|
0.31
|
|
Shares available on December 31 for options that may be granted
|
|
|
2,503
|
|
|
|
|
|
|
|
1,684
|
|
|
|
|
|
(1)
|
|
The intrinsic value of a stock option is the amount by which the fair value of the underlying stock exceeds the exercise price of the option. The fair value of our common stock was $2.29 at December 31, 2013 based upon the closing price on the OTC Market. As of December 31, 2013, the aggregate intrinsic value of options outstanding, exercisable and vested or expected to vest was $3.8 million, $3.0 million and $3.8 million, respectively.
|
(2)
|
|
The weighted average remaining contractual life for exercisable options is 6.27 years, and for options vested or expected to vest, is 5.41 years, as of December 31, 2013.
|
There were no stock option exercises during the years ended December 31, 2013 and 2012. The total fair value of options vested during the years ended December 31, 2013 and 2012, was approximately $0.4 million and nil, respectively. As of December 31, 2013, there was no unrecognized compensation cost related to unvested share-based compensation arrangements granted under our plans, as all unvested options at December 31, 2013 vested on January 1, 2014.
VERITEQ CORPORATION AND SUBSIDIARIES
(formerly known as Digital Angel Corporation)
(A Development Stage Company)
Notes to Consolidated Financial Statements, cont.
The following table summarizes information about our stock options at December 31, 2013 (shares in thousands):
|
|
|
|
|
Outstanding Options
|
|
|
Exercisable Stock
Options
|
|
Range of Exercise Prices
|
|
|
Shares
|
|
|
Weighted-
Average
Remaining
Contractual
Life in Years
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
$0
|
to
|
$100
|
|
|
|
2,593
|
|
|
|
5.5
|
|
|
$
|
1.03
|
|
|
|
1,544
|
|
|
$
|
0.66
|
|
$101
|
to
|
$200
|
|
|
|
5
|
|
|
|
4.2
|
|
|
|
156.71
|
|
|
|
5
|
|
|
|
156.71
|
|
$201
|
to
|
$300
|
|
|
|
1
|
|
|
|
3.6
|
|
|
|
244.80
|
|
|
|
1
|
|
|
|
244.80
|
|
$301
|
to
|
$400
|
|
|
|
1
|
|
|
|
2.6
|
|
|
|
342.29
|
|
|
|
1
|
|
|
|
342.29
|
|
$401
|
to
|
$500
|
|
|
|
—
|
|
|
|
2.5
|
|
|
|
451.20
|
|
|
|
—
|
|
|
|
451.20
|
|
$501
|
to
|
$600
|
|
|
|
11
|
|
|
|
1.8
|
|
|
|
568.39
|
|
|
|
11
|
|
|
|
568.39
|
|
$601
|
to
|
$700
|
|
|
|
5
|
|
|
|
0.2
|
|
|
|
661.82
|
|
|
|
5
|
|
|
|
661.82
|
|
$701
|
to
|
$800
|
|
|
|
1
|
|
|
|
1.7
|
|
|
|
733.38
|
|
|
|
1
|
|
|
|
733.38
|
|
$801
|
to
|
$900
|
|
|
|
9
|
|
|
|
1.2
|
|
|
|
871.20
|
|
|
|
9
|
|
|
|
871.20
|
|
$901
|
to
|
$1,000
|
|
|
|
2
|
|
|
|
0.7
|
|
|
|
966.93
|
|
|
|
2
|
|
|
|
966.93
|
|
Total stock options
|
|
|
2,628
|
|
|
|
5.4
|
|
|
|
9.01
|
|
|
|
1,579
|
|
|
|
13.95
|
|
As of December 31, 2013, 2.5 million shares were available for issuance under our plans.
Restricted Stock Grants
In January 2013, we issued approximately 0.9 million shares of our restricted common stock to a member of our senior management. This restricted stock vests in January 2015. The total value of the restricted stock of approximately $1.4 million is being expensed over the vesting period. During the year ended December 31, 2013, we recorded $0.7 million in compensation expense related to the restricted stock. We did not incur any restricted stock expense in 2012.
8. Income Taxes
The benefit for income taxes consists of:
|
|
Year Ended
December 31,
2013
|
|
|
Year Ended
December 31,
2012
|
|
Current income tax benefit
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes benefit
|
|
|
|
|
|
|
800
|
|
Total income tax benefit
|
|
$
|
---
|
|
|
$
|
800
|
|
We did not have an income tax (provision) benefit for the year ended December 31, 2013. The income tax benefit of $0.8 million for the year ended December 31, 2012 resulted from the utilization of deferred tax assets to offset a deferred tax liability associated with the PAH acquisition. We have incurred losses and therefore have provided a valuation allowance of approximately $2.9 million against our net deferred tax assets as of December 31, 2013.
The tax effects of temporary differences and carryforwards that give rise to significant portions of deferred tax assets and liabilities consist of the following:
|
|
2013
|
|
|
2012
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Accrued compensation and stock-based compensation
|
|
$
|
1,580
|
|
|
$
|
401
|
|
Net operating loss carryforwards
|
|
|
1,961
|
|
|
|
454
|
|
Gross deferred tax assets
|
|
|
3,541
|
|
|
|
855
|
|
Valuation allowance
|
|
|
(2,905
|
)
|
|
|
(152
|
)
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
(636
|
)
|
|
|
(703
|
)
|
Gross deferred tax liabilities
|
|
|
(636
|
)
|
|
|
(703
|
)
|
Net Deferred Tax Assets
|
|
$
|
—
|
|
|
$
|
—
|
|
The valuation allowance for deferred tax assets increased by $2.8 million and $0.2 million in 2013 and 2012, respectively due primarily to interest and other expenses not currently deductible and net operating losses.
VERITEQ CORPORATION AND SUBSIDIARIES
(formerly known as Digital Angel Corporation)
(A Development Stage Company)
Notes to Consolidated Financial Statements, cont.
At December 31, 2013, we had U.S. net operating loss carryforwards of approximately $5.1 million for income tax purposes, which expire in varying amounts through 2033. The amount of any benefit from our U.S. tax net operating losses is dependent on: (1) our ability to generate future taxable income
, and (2) the unexpired amount of net operating loss carryforwards available to offset amounts payable on such taxable income. Any greater than a fifty percent change in ownership under IRC section 382 places significant annual limitations on the use of our U.S. net operating losses to offset any future taxable U.S. income we may generate. As a result of the VeriTeQ acquisition, which was a tax-free reorganization
, we exceed the fifty percent threshold, and as a result, effective on July 8, 2013, the closing date of the VeriTeQ transaction, VC’s U.S. net operating losses became limited to approximately $0.5 million in the aggregate
. Accordingly, under purchase accounting, we have eliminated all prior loss carryforwards generated by VC in excess of the amount that is not currently limited. In addition there may be limitations on VAC net operating losses under IRC Section 382 due to common stock issued since inception. Certain future transactions could cause a more than fifty percent ownership change in the future, including (a) additional issuances of shares of common stock by us or (b) acquisitions or sales of shares by certain holders of our shares, including persons who have held, currently hold, or accumulate in the future five percent or more of our outstanding stock.
The reconciliation of the effective tax rate with the statutory federal income tax (benefit) rate is as follows:
|
|
2013
|
|
|
2012
|
|
|
|
%
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
Statutory tax/(benefit) rate
|
|
|
(35
|
)
|
|
|
(35
|
)
|
State income taxes, net of federal benefits
|
|
|
(4
|
)
|
|
|
(4
|
)
|
Transaction costs not deductible
|
|
|
1
|
|
|
|
—
|
|
Interest and other expense not deductible
|
|
|
20
|
|
|
|
—
|
|
Change in deferred tax asset valuation allowance
|
|
|
18
|
|
|
|
6
|
|
|
|
|
(--
|
)
|
|
|
(33
|
)
|
We did not have an unrecognized tax benefit at December 31, 2013 and 2012.
We file income tax returns in the U.S. federal jurisdiction and various states in which we operate. We will file separate federal and state tax returns for VC and VAC for the periods prior to the VeriTeQ Transaction and consolidated tax returns for subsequent periods. We have not yet filed our U.S. federal and certain state tax returns for VC for 2013 and for VAC for 2013 and 2012 and we do not currently have any examinations ongoing. Tax returns for the years 2010 onwards are subject to federal, state or local examinations.
9. Loss Per Share
A reconciliation of the numerator and denominator of basic and diluted loss per share is provided as follows, in thousands, except per share amounts:
|
|
2013
|
|
|
2012
|
|
Numerator for basic and diluted loss per share:
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(15,077
|
)
|
|
$
|
(1,605
|
)
|
Denominator for basic and diluted loss per share:
|
|
|
|
|
|
|
|
|
Basic and diluted weighted-average shares outstanding
(1)(2)
|
|
|
8,607
|
|
|
|
6,529
|
|
Loss per share — basic and diluted
|
|
|
|
|
|
|
|
|
Total — basic and diluted
|
|
$
|
(1.75
|
)
|
|
$
|
(0.25
|
)
|
|
(1)
|
Basic and diluted loss per common share has been computed by dividing the loss by the weighted average number of common shares outstanding.
|
|
(2)
|
The following stock options and warrants and shares issuable upon conversion of convertible notes payable outstanding at December 31, 2013 and 2012 were not included in the computation of dilutive loss per share because the net effect would have been anti-dilutive:
|
VERITEQ CORPORATION AND SUBSIDIARIES
(formerly known as Digital Angel Corporation)
(A Development Stage Company)
Notes to Consolidated Financial Statements, cont.
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
|
|
(in thousands)
|
|
Stock options
|
|
|
2,628
|
|
|
|
1,531
|
|
Warrants
|
|
|
3,380
|
|
|
|
218
|
|
Shares issuable upon conversion of convertible notes payable
|
|
|
4,709
|
|
|
|
2,308
|
|
|
|
|
10,717
|
|
|
|
4,057
|
|
10. Related Party Transactions
Shared Services Agreement with PSID
We entered into a shared services agreement (“SSA”) with PSID on January 11, 2012, pursuant to which PSID agreed to provide certain services, including administrative, rent, accounting, business development and marketing, to us in exchange for $30,000 per month. The SSA has also included working capital advances from time to time. The term of the SSA commenced on January 23, 2012. The first payment for such services was not payable until we received gross proceeds of a financing of at least $500,000. On June 25, 2012, the level of resources provided under the SSA was reduced and the agreement was amended, pursuant to which all amounts owed to PSID under the SSA as of May 31, 2012 were converted into approximately 2.3 million shares of VAC’s common stock valued at $0.2 million. In addition, effective June 1, 2012, the monthly charge for the shared services under the SSA was reduced from $30,000 to $12,000.
On August 28, 2012, the SSA was further amended to align with the level of services being provided, pursuant to which, effective September 1, 2012, the monthly charge for the shared services under the SSA was reduced from $12,000 to $5,000. On April 22, 2013, we and PSID entered into a non-binding letter agreement in which PSID agreed to provide up to an additional $60,000 of support during April and May 2013.
On July 8, 2013, we entered into a letter Agreement with PSID (the “July Letter Agreement”) to amend certain terms of several agreements between PSID and us. The July Letter Agreement amended certain terms of the SSA entered into between PSID and us on January 11, 2012, as amended, the APA entered into on August 28, 2012, as amended, and the PSID Note dated January 11, 2012, in favor of PSID in the principal amount of $200,000. VC assumed the obligations under the PSID Note in connection with the Share Exchange as of the date of the July Letter Agreement.
On November 8, 2013, we entered into a Letter Agreement (the “November Letter Agreement”) with PSID which further amended the terms of the several agreements between PSID and us.
The July Letter Agreement, as modified by the November Letter Agreement, provides for:
|
(i)
|
At closing of a capital raise with cumulative gross proceeds of at least $3.0 million, $100,000 of the balance owed under the SSA shall be due within two business day after funding. Within thirty and sixty days after the initial $100,000 payment, we shall pay $50,000 each (total of an additional $100,000) and the balance of the outstanding amount shall be paid by 90 days after the initial $100,000 is paid. In the event any of the balance is unpaid at March 31, 2014, interest on the outstanding balance accrues at 10% per annum. If the initial $100,000 payment is made by March 31, 2014, no interest shall accrue so long as we comply with the payment schedule required.
|
|
(ii)
|
The elimination of minimum royalties payable to PSID under the APA in their entirety. In the event that royalty payments under the APA based on our attainment of certain sales levels are not at least $800,000 for the calendar year 2014, then we shall grant PSID Corporation a non-exclusive, perpetual, non-transferrable, world-wide, fully paid license to said patents.
|
|
(iii)
|
An amendment to the PSID Note, with a principal and interest balance of $228,000 on September 30, 2013, to provide that no interest will accrue on the PSID Note from July 8, 2013 to September 30, 2013 and to include a conversion feature under which the PSID Note may be repaid, at our option, in VC’s common stock in lieu of cash.
|
|
(iv)
|
VC will grant PSID a warrant to purchase 300,000 shares of common stock at an exercise price of $2.84. The warrants will be exercisable for a period of five years. The terms and form of warrant will be the same as those granted to the Investors, which are more fully discussed in Note 5.
|
VERITEQ CORPORATION AND SUBSIDIARIES
(formerly known as Digital Angel Corporation)
(A Development Stage Company)
Notes to Consolidated Financial Statements, cont.
Pursuant to the terms of the July Letter Agreement, on October 10, 2013, we issued approximately 16,666 shares of common stock to PSID in partial repayment of the PSID Note, and we agreed to issue an additional 135,793 shares of common stock. In connection with the November 2013 financing as more fully discussed in Note 5, the PSID note was assigned to certain investors.
As of December 31, 2013 and December 31, 2012, we owed PSID $0.2 million and $0.1 million, respectively under the SSA.
Accrued Expenses
Included in accrued expenses at December 31, 2013 and 2012 are approximately $1.6 million and $0.7 million, respectively, owed to the Company's officers and directors.
Investment from VeriTeQ Corporation’s Director
Following VC’s approval of the Share Exchange in June 2013, VAC approached VC for a small, short-term bridge loan or equity investment. In light of the many conditions to closing, VC’s board decided not to make the loan or investment. VC’s then interim chief executive officer and president and then chairman of VC’s board, Daniel E. Penni, agreed to make a $25,000 equity investment in VAC. As a result of such investment in June 2013, Mr. Penni owned shares of VAC’s common stock, which have been exchanged for 19,084 shares of VC’s common stock. Mr. Penni continues to serve as a member of VC’s board.
Notes Payable
During the years ended December 31, 2013 and 2012, we issued notes payable to certain directors, officers and a relative of a director. These notes are further discussed in Note 5. Subsequent to December 31, 2013, we issued notes payable to certain directors and officers. These notes are further discussed in Note 14.
11. Commitments and Contingencies
Rentals of space, a vehicle, and office equipment amounted to approximately $77 thousand and $11 thousand for the years ended December 31, 2013 and 2012, respectively. We did not incur rent expense from December 14, 2011 (inception) to December 31, 2011.
We lease our headquarter office facility under a lease expiring in May 2018.
We have entered into employment agreements with Mr. Scott Silverman, our Chief Executive Officer, and Mr. Randolph Geissler, our President. Previously, Messrs. Silverman and Geissler had employment agreements with VAC.
Scott R. Silverman Employment Agreements
Effective January 1, 2012, Mr. Scott R. Silverman entered into the Employment and Non-Compete Agreement, or the 2012 Employment Agreement, with VAC. The 2012 Employment Agreement terminated five years from the effective date. The 2012 Employment Agreement provided for an annual base salary in 2012 of $300,000 with minimum annual increases of 10% of the base salary and an annual bonus equal to the annual base salary then in effect. Mr. Silverman was also entitled to an annual non-allocable expense payment of $45,000 each year and other fringe benefits. If Mr. Silverman’s employment was terminated prior to the expiration of the term of the 2012 Employment Agreement, Mr. Silverman was to receive (i) all earned but unpaid salary and bonuses; (ii) the greater of the base salary from the date of termination through December 31, 2016 or two times the base salary; and (iii) the average bonus paid by us to Mr. Silverman for the last three full calendar years (or such lesser time period if the 2012 Employment Agreement was terminated less than three years from the effective date), plus certain fringe benefits required to be paid by us. In addition, the 2012 Employment Agreement contained a change of control provision that provided for the payment of five times the then current base salary and five times the average bonus paid to Mr. Silverman for the three full calendar years immediately prior to the change of control, as defined in the 2012 Employment Agreement. Any outstanding stock options and restricted stock held by Mr. Silverman as of the date of his termination or a change of control became vested and exercisable as of such date, and remained exercisable during the remaining life of the option.
Mr. Silverman’s 2012 Employment Agreement was terminated effective July 8, 2013 at which time Mr. Silverman entered into a new employment agreement effective with the closing of Exchange Agreement, which was amended and restated on November 14, 2013, (the “Silverman Employment Agreement”) appointing Mr. Silverman as our chairman and chief executive officer, effective as of July 8, 2013 until December 31, 2016. Under the Silverman Employment Agreement, Mr. Silverman will receive a base salary of $330,000, which base salary will be reviewed annually and is subject to a minimum increase of 5% per annum during each calendar year of the term. Accordingly, Mr. Silverman’s salary was increased to $346,500 beginning January 1, 2014. During the term, Mr. Silverman will be eligible to receive an annual bonus, based on performance metrics and goals as determined annually by the Board of Directors, with the amount of such bonus to be determined based upon the annual objectives determined by the compensation committee of the Board of Directors, but in no event to be less than 100% of earned base salary for the applicable year. The bonus shall be paid in cash or, if Mr. Silverman and the Company agree at the time, using shares of the Company’s common stock, at a valuation equal to fair market value. Mr. Silverman is also entitled to (i) an annual non-allocable expense payment of $30,000 payable in two equal instalments on or before April 1st and October 1st of each year; (ii) the Company shall, at its option, either lease for Mr. Silverman an automobile, or reimburse Mr. Silverman for the lease or financing payments incurred by Mr. Silverman on his automobile, the amount of such reimbursement to be reasonably comparable to the current cost of Mr. Silverman’s current automobile. The Company shall reimburse car-related expenses; (iii) the Company shall, at its option, either provide to Mr. Silverman disability insurance that provides standard disability coverage and terms, in an amount of at least equal to $22,500 per month until age 65, or reimburse Mr. Silverman for the premium payments incurred by him for disability insurance coverage for himself, the amount of such reimbursement to be reasonably comparable to the current cost of his disability insurance; (iv) the Company shall provide comprehensive health insurance as it provides to other executives and employees as well as reimbursement of health benefits of up to $5,000 per year; (v) reimbursement for expenses related to business attire in an amount not to exceed $950 per month; and (vi) if the Company elects to secure a key man life insurance policy on the life of Mr. Silverman, it will provide a split-dollar policy. On January 30, 2014, the compensation committee of the board of directors authorized a discretionary bonus in the amount of $100,000 to be paid to Mr. Silverman. This discretionary bonus is in addition to Mr. Silverman’s minimum bonus for 2013 under the terms of his employment agreement. The discretionary bonus shall be accrued. It will be paid in cash after the compensation committee determines we have adequate working capital to make such payments, or, if we are permitted to do so without triggering a reset provision on any outstanding warrants and the applicable employee so elects, in shares of our common stock, in which case the amount of the bonus would be increased by 25%.
VERITEQ CORPORATION AND SUBSIDIARIES
(formerly known as Digital Angel Corporation)
(A Development Stage Company)
Notes to Consolidated Financial Statements, cont.
Under the Silverman Employment Agreement, VC agreed to satisfy certain unpaid contractual obligations under Mr. Silverman’s December 2012 Employment Agreement aggregating $912,116, or the Silverman Contractual Obligations, if VC receives gross proceeds of an aggregate of $3,000,000 in cash in any capital investment or capital raise or series of capital investments or capital raises. The Silverman Contractual Obligations shall be payable as follows: (i) one-third (1/3rd) in cash and (ii) two-thirds (2/3rds) in shares of restricted VC common stock, based on the closing price of a share of VC’s common stock on the closing date of the investment. During 2013, Mr. Silverman was paid approximately $66 thousand of the Silverman Contractual Obligations in cash.
If Mr. Silverman’s employment is terminated prior to the expiration of the term, certain payments become due. In the event Mr. Silverman is terminated with cause or he terminates for any reason other than good reason, Mr. Silverman is entitled to receive (i) earned or accrued but unpaid, base salary, through the date of termination, (ii) any bonus earned or accrued and vested, but unpaid, (iii) the economic value of the employee’s accrued, but unused, vacation time, and (iv) any unreimbursed business expenses incurred by the employee (collectively, the “Accrued Obligations”). In the event Mr. Silverman is terminated without cause or he terminates for good reason, or upon his death, Mr. Silverman is entitled to receive the Accrued Obligations and a termination payment equal to his base salary from the date of termination through December 31, 2016, (or two years whichever is longer) plus bonus for such period, with such bonus being determined based upon the time remaining between the date of termination and December 31, 2016 (or two years, whichever is longer) and with the rate of bonus to be based upon the average annual bonus paid by the Company to Mr. Silverman over the last three (3) full calendar years (or if the Agreement is terminated before Mr. Silverman has been employed by the Company for three (3) full calendar years, for purposes of calculating the average Annual Bonus, the Company will use 100% of Mr. Silverman’s base salary as the annual bonus) plus certain benefits as set forth in the Silverman Employment Agreement.
In addition, the Silverman Employment Agreement contains a change of control provision that provides for the payment of 299% of Mr. Silverman’s base salary plus 299% of the average annual bonus paid over the last three (3) full calendar years (or 60% of base salary if the Silverman Employment Agreement is terminated before Mr. Silverman has been employed for three full years). Any outstanding stock options and unvested restricted stock held by Mr. Silverman as of the date of termination (other than for cause or by Mr. Silverman without good reason) or a change of control shall become vested and exercisable as of such date, and remain exercisable during the life of the option. In the event Mr. Silverman is terminated for cause or terminates without good reason, any unvested options and restricted stock awards shall terminate and all vested options shall remain exercisable for a period of ninety (90) days. The Silverman Employment Agreement also contains non-compete and confidentiality provisions which are effective from the date of employment through eighteen months from the date the Silverman Employment Agreement is terminated.
VERITEQ CORPORATION AND SUBSIDIARIES
(formerly known as Digital Angel Corporation)
(A Development Stage Company)
Notes to Consolidated Financial Statements, cont.
Randolph Geissler Employment Agreements
On January 2, 2013, VAC entered into an employment agreement with our president, Mr. Randolph Geissler with an effective date of September 1, 2012, or the Geissler 2012 Agreement. The Geissler 2012 Agreement called for an annual base salary of $200,000 and discretionary annual and incentive bonuses. The term of the Geissler 2012 Agreement was two years from the effective date and could be extended by mutual consent of the parties. The Geissler 2012 Agreement also provided for the issuance on January 2, 2013 of 4.5 million restricted shares of our common stock, which vested the earlier of January 2, 2015 or a change of control of VAC. Payments of compensation under the Geissler 2012 Agreement commenced within 30 days of VAC receiving a capital investment from any third party in excess of $5.0 million, the first payment of which was to be retroactive to September 1, 2012 and included any and all sums due and owing to Mr. Geissler at that time. Upon termination of the Geissler 2012 Agreement by Mr. Geissler or us, Mr. Geissler was entitled to receive any earned but unpaid salary and bonuses and all outstanding stock options and restricted stock was to be forfeited. Upon termination of the agreement by us without cause, Mr. Geissler was also entitled to receive certain fringe benefits through December 2014. Upon a change of control as defined in the agreement, Mr. Geissler was entitled to receive any earned but unpaid salary and bonuses and any outstanding stock options and restricted stock was to vest and the stock options were to remain exercisable through the life of the option. The Geissler 2012 Agreement was terminated effective July 8, 2013 at which time Mr. Geissler entered into a new employment agreement effective with the closing of Exchange Agreement, which was amended and restated on November 14, 2013, or the Geissler Employment Agreement appointing Mr. Geissler as president of VC, effective as of July 8, 2013. The Geissler Employment Agreement is for a term of two (2) years and is renewable for additional one (1) year periods upon mutual agreement. Under the Geissler Employment Agreement, Mr. Geissler will receive a base salary of $200,000, which base salary will be reviewed annually and is subject to a minimum increase of 5% per annum each calendar year. Accordingly, Mr. Geissler’s salary was increased to $210,000 beginning January 1, 2014. Mr. Geissler is eligible to receive an annual bonus, based on performance metrics and goals as determined annually by the Board of Directors, with the amount of such bonus to be determined based upon the annual objectives determined by the compensation committee of the Board of Directors, but in no event to be less than 100% of earned base salary for the applicable year. The bonus shall be paid in cash or, if Mr. Geissler and the Company agree at the time, using shares of the Company’s common stock, at a valuation equal to fair market value. On January 30, 2014, the compensation committee of the board of directors authorized a discretionary bonus in the amount of $75,000 to be paid to Mr. Geissler. This discretionary bonus is in addition to Mr. Geissler’s minimum bonus for 2013 under the terms of his employment agreement. The discretionary bonus shall be accrued. It will be paid in cash after the compensation committee determines we have adequate working capital to make such payments, or, if we are permitted to do so without triggering a reset provision on any outstanding warrants and the applicable employee so elects, in shares of our common stock, in which case the amount of the bonus would be increased by 25%.
Mr. Geissler is also entitled to the following: (i) the Company shall, at its option, either lease for Mr. Geissler an automobile, or reimburse Mr. Geissler for the lease or financing payments incurred by Mr. Geissler’s on his automobile, the amount of such reimbursement to be reasonably comparable to 75% of the current cost on the automobile then being provided to the Company’s CEO. The Company shall reimburse car-related expenses; (ii) the Company shall, at its option, either provide to Mr. Geissler disability insurance that provides standard disability coverage and terms, in an amount of at least equal to $15,000 per month until age 65, or reimburse Mr. Geissler for the premium payments incurred by him for disability insurance coverage for himself, the amount of such reimbursement to be reasonably comparable to the current cost of his disability insurance; (iii) the Company shall provide comprehensive health insurance as it provides to other executives and employees; (iv) reimbursement for expenses related to business attire in an amount not to exceed $950 per month; and (v) if the Company elects to secure a key man life insurance policy on the life of Mr. Geissler, it will provide a split-dollar policy.
Under the Geissler Employment Agreement, the Company agreed to satisfy certain currently unpaid contractual obligations under Mr. Geissler’s January 2, 2013 employment agreement of $166,666, or the Geissler Contractual Obligations, if VC receives gross proceeds of an aggregate of $3,000,000 in cash in any capital investment or capital raise or series of capital investments or capital raises. The Geissler Contractual Obligations shall be payable as follows: (i) one-third (1/3rd) in cash and (ii) two-thirds (2/3rds) in shares of restricted VC common stock, based on the closing price of a share of VC’s common stock on the closing date of the investment.
If Mr. Geissler’s employment is terminated for cause or he terminates for any reason other than good reason, Mr. Geissler is entitled to receive the Accrued Obligations. In the event Mr. Geissler is terminated without cause or he terminates for good reason, or termination upon his death, Mr. Geissler is entitled to receive the Accrued Obligations and a termination payment equal to one times his base salary plus the previous year’s bonus, but no less than one times his base salary. In the event that Mr. Geissler is terminated as a result of a change in control, Mr. Geissler is entitled to receive the Accrued Obligations and a termination payment equal to two times his base salary, plus the previous year’s bonus, but no less than two times his base salary. Any termination payment shall be payable to Mr. Geissler in cash, or if Mr. Geissler agrees, in shares of the Company’s common stock valued at market value. Any outstanding stock options and unvested restricted stock held by Mr. Geissler as of the date of termination (other than for cause or by Mr. Geissler without good reason) or a change of control shall become vested and exercisable as of such date, and remain exercisable during the life of the option. In the event Mr. Geissler is terminated for cause or terminates without good reason, any unvested options and restricted stock awards shall terminate and all vested options shall remain exercisable for a period of ninety (90) days. The Geissler Employment Agreement also contains non-compete and confidentiality provisions which are effective from the date of employment through one year from the date the Geissler Employment Agreement is terminated.
VERITEQ CORPORATION AND SUBSIDIARIES
(formerly known as Digital Angel Corporation)
(A Development Stage Company)
Notes to Consolidated Financial Statements, cont.
The approximate minimum payments required under operating leases and employment contracts that have initial or remaining terms in excess of one year at December 31, 2013, are as follows (in thousands):
Year
|
|
Minimum
Rental
Payments
|
|
|
Employment
Contracts
|
|
2014
|
|
$
|
48
|
|
|
$
|
1,229
|
|
2015
|
|
|
47
|
|
|
|
1,285
|
|
2016
|
|
|
40
|
|
|
|
1,343
|
|
2017
|
|
|
42
|
|
|
|
—
|
|
2018
|
|
|
17
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
194
|
|
|
$
|
3,857
|
|
Michael Krawitz Employment Agreement
In addition, effective January 31, 2014, we entered into an employment agreement with Michael Krawitz to serve as our Chief legal and Financial Officer. Mr. Krawitz’ employment agreement is described in Note 14.
Liquidation of Signature Industries, Limited
In March 2013, VC appointed a liquidator and initiated the formal liquidation of a U.K. subsidiary, Signature Industries Limited (“Signature”), primarily related to its outstanding liabilities. VC used £40,000 ($61,000) of the purchase price from the sale of Signature’s former division, Digital Angel Radio Communications Limited (“DARC”) to satisfy its estimated portion of Signature’s outstanding liabilities. However, one party has submitted a claim to the liquidator for approximately £244,000 (U.S. $0.4 million). This claim is associated with an outsourced manufacturing agreement related to a terminated manufacturing contract. As a result of the termination of the contract, Signature did not purchase any product under the manufacturing agreement and, accordingly, VC, in consultation with outside legal counsel, does not believe that any amount is owed per the terms of the agreement. However, this claim could result in VC having to pay an additional estimated portion of Signature’s outstanding liabilities. We expect the liquidation to be completed by the middle of 2014, although it could extend beyond the expected timeframe.
12. Legal Proceedings
We have been informed by the New Jersey Department of Environmental Protection that a subsidiary of a predecessor business, sold a building in 2006 for which an environmental action has been claimed. The claim is being reviewed by the Company’s outside legal counsel. We have not yet determined the impact on our financial condition or cash flows, if any
.
13. Supplemental Cash Flow Information
We had the following non-cash operating, investing and financing activities (in thousands):
|
|
For the Year Ended December 31,
2013
|
|
|
For the Year Ended December 31,
2012
|
|
Non-cash operating activities:
|
|
|
|
|
|
|
|
|
Issuance of shares of common stock to settle the partial payment of payable under a shared services agreement with PSID
|
|
$
|
—
|
|
|
$
|
160
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Net assets acquired from VC in excess of cash acquired for common stock
|
|
|
117
|
|
|
|
—
|
|
Acquisition of assets for common stock, assumption of stock options and a promissory note
|
|
|
—
|
|
|
$
|
1,200
|
|
Notes and accrued interest related to notes converted into common stock
|
|
|
420
|
|
|
|
—
|
|
Issuance of common stock in partial payment of notes payable
|
|
|
25
|
|
|
|
—
|
|
14. Subsequent Events
Michael E. Krawitz Employment Agreement
Effective January 31 2014, we entered into an employment agreement with Michael Krawitz to serve as our Chief Legal and Financial Officer, or the Krawitz Employment Agreement. The Krawitz Employment Agreement is for an initial term of two (2) years and is renewable for additional one (1) year terms upon mutual agreement of the parties. Under the Krawitz Employment Agreement, Mr. Krawitz will receive a base salary of $210,000, which base salary will be reviewed annually by the compensation committee and is subject to a minimum increase of 5% per annum, with the first increase to be effective on January 1, 2015. Mr. Krawitz is also entitled to (i) disability insurance or reimbursement of disability insurance in an amount at least equal to $15,000 per month until age 65; (ii) health insurance; (iii) an automobile or reimbursement of lease or financing payments incurred, the amount of such reimbursement to be reasonably comparable to 75% of the current cost of the automobile being provided to our Chief Executive Officer; and (iv) life insurance. During the term of the Krawitz Employment Agreement, Mr. Krawitz is eligible to receive an annual bonus based on performance metrics and goals as determined annually by the Company’s Board of Directors, with the amount of such bonus to be determined based upon annual objectives determined by the compensation committee of the Board of Directors, but in no event will be less than 100% of Mr. Krawitz’s earned base salary for the applicable year.
VERITEQ CORPORATION AND SUBSIDIARIES
(formerly known as Digital Angel Corporation)
(A Development Stage Company)
Notes to Consolidated Financial Statements, cont.
If Mr. Krawitz’s employment is terminated prior to the expiration of the term, certain payments become due. In the event Mr. Krawitz is terminated with cause or he terminates for any reason other than good reason, Mr. Krawitz is entitled to receive (i) earned or accrued but unpaid, base salary, through the date of termination, (ii) any bonus earned or accrued and vested, but unpaid, (iii) the economic value of the employee’s accrued, but unused, vacation time, and (iv) any unreimbursed business expenses incurred by the employee, collectively, the Krawitz Accrued Obligations. In the event Mr. Krawitz is terminated without cause or he terminates for good reason, Mr. Krawitz is entitled to receive the Krawitz Accrued Obligations and a termination payment equal to his base salary plus the previous year’s bonus (but no less than one times his base salary). In the event that Mr. Krawitz is terminated as a result of a change in control, Mr. Krawitz is entitled to receive any Krawitz Accrued Obligations and a termination payment equal to two times his base salary, plus the previous year’s bonus, but no less than two times his base salary. Any outstanding stock options and unvested restricted stock held by Mr. Krawitz as of the date of termination (other than for cause or by Mr. Krawitz without good reason) or a change of control shall become vested and exercisable as of such date, and remain exercisable during the life of the option. In the event Mr. Krawitz is terminated for cause or terminates without good reason, any unvested options and restricted stock awards shall terminate and all vested options shall remain exercisable for a period of ninety (90) days. The Krawitz Employment Agreement also contains non
-compete provisions which are effective from the date of employment through one year from the date the Krawitz Employment Agreement is terminated.
Letter Agreement with Digital Angel Radio Communications Limited. (DARC)
On January 30, 2014, we and the buyers of DARC entered into a letter agreement under which we agreed to accept a payment of £62,000 (USD approximately $0.1 million) in full and final settlement of a deferred purchase price related to VC’s sale of DARC in March 2013. As a result, we will record, a loss of approximately USD $52,000 in the first quarter of 2014. All of the other provisions (including, without limitation, the indemnities) agreed between VC, and/or the Buyers under the stock purchase agreement and any related documents remain in full force and effect.
Promissory Notes Entered Into Subsequent to December 31, 2013
We have entered into the following promissory notes subsequent to December 31, 2013. Several of these notes are with our directors and officers as noted:
|
●
|
On January 8, 2014, the Company entered into a promissory note, with our then director and current director and Chief Legal and Financial Officer, Michael Krawitz, wherein Mr. Krawitz loaned the Company the principal amount of $60,000. The note bears interest at 5% per annum and is due on demand.
|
|
●
|
On January 15, 2014, the Company entered into a promissory note with our President, Randolph Geissler, wherein Mr. Geissler loaned the Company the principal amount of $40,000. The note bears interest at 5% per annum and is due on demand.
|
|
●
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On January 15, 2014, the Company entered into a promissory note with our Chairman of the Board and CEO, Scott Silverman, wherein Mr. Silverman loaned the Company the principal amount of $60,000. The note bears interest at 5% per annum and is due on demand. On April 7, 2014, $8,500 of the note was repaid leaving a current balance of $51,500 outstanding.
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On February 4, 2014, the Company entered into a promissory note with Corbin Properties LLC, wherein Corbin Properties loaned to the Company the principal amount of $175,000. The note matures on February 4, 2015, bears interest at the rate of 10% per annum and can be prepaid without penalty.
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On March 4, 2014, the Company entered into a promissory note with our director, Daniel Penni, wherein Mr. Penni loaned the Company the principal amount of $25,000. The note bears interest at 5% per annum and is due on demand.
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On March 5, 2014, the Company entered into a promissory note with Deephaven Enterprises, Inc. wherein Deephaven Enterprises, Inc. loaned the Company the principal amount of $25,000. The note bears interest at 9% per annum and matures on March 5, 2015. At any such time as would not cause a change to, or a right to change, the economics of any outstanding warrants or other debt, the note shall be automatically amended to allow the holder to convert the note, or any part thereof, into validly issued, fully paid and non-assessable shares of common stock of the Company. The number of shares of common stock issuable upon conversion of any conversion amount shall be determined by dividing (x) such conversion amount by (y) the conversion price. Conversion amount means the sum of (x) portion of the principal to be converted, redeemed or otherwise with respect to which this determination is being made and (y) all accrued and unpaid interest with respect to such portion of the principal amount. Conversion price means, as of any conversion date or other date of determination, $0.35, adjusted for any stock splits, reverse stock splits
or similar transactions.
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VERITEQ CORPORATION AND SUBSIDIARIES
(formerly known as Digital Angel Corporation)
(A Development Stage Company)
Notes to Consolidated Financial Statements, cont.
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On March 6, 2014, the Company entered into a promissory note with James Rybicki Trust where James Rybicki Trust loaned the Company the principal amount of $25,000. The note bears interest at 9% per annum and matures on March 6, 2015. At any such time as would not cause a change to, or a right to change, the economics of any outstanding warrants or other debt, the note shall be automatically amended to allow the holder to convert the note, or any part thereof, into validly issued, fully paid and non-assessable shares of common stock of the Company. The number of shares of common stock issuable upon conversion of any conversion amount shall be determined by dividing (x) such conversion amount by (y) the conversion price. Conversion amount means the sum of (x) portion of the principal to be converted, redeemed or otherwise with respect to which this determination is being made and (y) all accrued and unpaid interest with respect to such portion of the principal amount. Conversion price means, as of any conversion date or other date of determination, $0.35, adjusted for any stock splits, reverse stock splits
or similar transactions.
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On March 10, 2014, the Company entered into a promissory note with the CEO of PSID, William Caragol, wherein Mr. Caragol loaned the Company the principal amount of $25,000. The note matures on March 10, 2015, bears interest at the rate of 9% per annum and can be prepaid without penalty. At any such time as would not cause a change to, or a right to change, the economics of any outstanding Warrants or Other Debt (as defined in the note) of the Company, the note shall be automatically amended to allow the holder to convert the note, or any part thereof, into validly issued, fully paid and non-assessable shares of common stock of the Company in accordance with the following provisions: (i) the number of shares of common stock issuable upon conversion of any Conversion Amount shall be determined by dividing (x) such Conversion Amount by (y) the Conversion Price (the “Conversion Rate”). “Conversion Amount” means the sum of (x) portion of the principal to be converted, redeemed or otherwise with respect to which this determination is being made and (y) all accrued and unpaid interest with respect to such portion of the principal amount. “Conversion Price” means, as of any Conversion Date or other date of determination, 60% of the lowest closing bid price over the ten trading days immediately preceding the date of the delivery or deemed delivery of the applicable Conversion Notice. All such determinations to be appropriately adjusted for any share dividend, share split, share combination, reclassification or similar transaction that proportionately decreases or increases the common stock during such 10-day calculation period.
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On March 20, 2014, the Company entered into a promissory note with Deephaven Enterprises, Inc. wherein Deephaven Enterprises, Inc. loaned the Company the principal amount of $61,225. The note matures on March 20, 2015, bears interest at the rate of 9% per annum and can be prepaid without penalty. At any such time as would not cause a change to, or a right to change, the economics of any outstanding Warrants or Other Debt (as defined in the note), certain warrants held by the Deephaven Enterprises, Inc. or its owner: (i) would be amended to change the exercise price thereof to $.35 per shares; (ii) would allow the holder to tender the note at any time in lieu of payment of the exercise price on any warrants held by the holder or owner; and (iii) the Company will issue a new warrant to acquire 300,000 shares of the Company’s common stock at a price of $.35 per share. Notwithstanding anything in the note to the contrary, these are not valid or binding, and shall not be deemed to be a part of this note, so long as their existence would trigger a reduction in the exercise price or other change in the terms of any warrant issued by the Company to any person, other than to an officer or director (a “Warrant”), or would trigger a default or the change in the conversion or other economic terms under any indebtedness or securities or related agreements of the Company (“Other Debt”), or would give the holder of any such Warrant or Other Debt the right to alternative pricing or economics as a result of the existence of the terms contained in this section. The provisions of this section are intended and shall be interpreted as to comply with and neither contravene nor trigger the provisions of section 2 of the Warrants issued on November 13, 2013 and Section 7 of the Notes issued November 13, 2013.
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Release of a Portion of Restricted Funds
During the first week of April, 2014, to provide the Company with additional liquidity, certain of the investors released approximately $145,000 of the funds that were previously held in restricted bank accounts pursuant to the terms of the November 13, 2013 financing, which is more fully discussed in Note 5. Therefore, the balance in the restricted accounts aggregates approximately $0.7 million as of April 15, 2014.
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