Notes to Condensed Consolidated Financial Statements (Unaudited)
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”), which at the time was a related party. In December 2012, VAC formed a subsidiary, VTQ IP Holding Corporation, a Delaware corporation. VC, VAC and VAC’s subsidiaries are referred to together as, “VeriTeQ,” “the Company,” “we,” “our,” and “us”. Our business consists of ongoing efforts to provide implantable medical device identification and radiation dose measurement technologies to the healthcare industry.
The accompanying condensed consolidated financial statements of the Company have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) and with the instructions to Form 10-Q and Article 8 of Regulation S-X under the Securities Exchange Act of 1934, as amended. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The interim financial information in this report has not been audited. In the opinion of the Company’s management, all adjustments (consisting of normal recurring adjustments) considered necessary for fair financial statement presentation have been made. Results of operations reported for interim periods may not be indicative of the results for the entire year. These condensed consolidated financial statements and notes should be read in conjunction with the consolidated financial statements and notes for the year ended December 31, 2013 included in our Annual Report for Form 10-K filed with the Securities and Exchange Commission (“SEC”) on April 15, 2014.
Going Concern
The accompanying financial statements have been prepared assuming we will continue as a going concern, which contemplates the realization of assets and the liquidation of liabilities in the normal course of business. We are in the development stage, have incurred operating losses since our inception and have a working capital deficit. Our cash position is critically low, and payments critical to our survival are not being made in the ordinary course. Failure to raise capital in the coming days to fund our operations and generate positive cash flow to fund such operations will have a material adverse effect on our financial condition. These factors raise substantial doubt about our ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from this uncertainty. Further, the report of the independent registered public accounting firm on the Company’s December 31, 2013 financial statements included a paragraph about the existence of substantial doubt concerning the Company’s ability to continue as a going concern.
We need to raise additional funds immediately and continuing until we begin to ship sufficient quantities of our products to fund our operations and we may not be able to obtain debt or equity funding at all, or if available, they may not be on favorable terms.
Although we had negative working capital at March 31, 2014, we are attempting to generate enough cash from: (i) capital raises; (ii) the release of funds held in restricted bank accounts, which is more fully described in Note 5; (iii) additional issuances of promissory notes, including to related parties; (iv) business operations as we have begun to ship our products; (v) through other investing and financing sources; (vi) from our ability to continue to delay certain salary and bonus payments to senior management until funds are available; and (vii) to undertake other cash management initiatives, including working with our vendors to continue to allow us to extend payment terms in order to operate our business for the twelve months ending March 31, 2015.
Our goal is to achieve profitability and to generate positive cash flows from operations. Our capital requirements depend on a variety of factors, including but not limited to, the cash that will be required to grow our business operations and to service our debt. Failure to 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.
Development Stage
The Company is in the development stage as defined by Accounting Standards Codification subtopic 915-10 Development Stage Entities ("ASC 915-10") and its success depends on its ability to obtain financing and realize its marketing efforts. To date, the Company has generated only a small amount of revenue, has incurred expenses and has sustained operating losses. Consequently, its operations are subject to all the risks inherent in the establishment of a new business enterprise. For the period from December 14, 2011 (Inception) through March 31, 2014, the Company has accumulated losses of approximately $13.1 million.
Share Exchange Agreement and Reverse Stock Split
On June 24, 2013, VAC and its stockholders entered in the Exchange Agreement with VC and the closing of the transaction (the “VeriTeQ Transaction”) took place on July 8, 2013 (the “Closing Date”). Pursuant to the terms of the Exchange Agreement, VAC exchanged all of its issued and outstanding shares of common stock for 4,107,592 shares of VC’s Series B Convertible Preferred Stock (the “Series B Preferred Stock”). On July 10, 2013, VC realized that it incorrectly issued the Series B Preferred Stock and as a result, on July 12, 2013, it exchanged the Series B Preferred Stock for 410,759 shares of its newly created Series C convertible preferred stock, par value $10.00 (the “Series C Preferred Stock”). The terms of the Series C Preferred Stock are substantially similar to the Series B Preferred Stock, including the aggregate number of shares of common stock into which the Series C Preferred Stock was convertible. Each share of Series C Preferred Stock was convertible into twenty shares of VC’s common stock, par value $0.01 per share (the “Conversion Shares”), automatically upon the effectiveness of the Reverse Stock Split (defined below) on October 18, 2013 (such transaction is sometimes referred to herein as the “Share Exchange”).
Under the terms of the Exchange Agreement, all outstanding stock options to purchase shares of VAC’s common stock, whether or not exercisable or vested, converted into options to acquire shares of VC’s common stock (the “Substitute Options”), and all outstanding warrants to purchase shares of VAC’s common stock converted into warrants to purchase shares of VC’s common stock (the “Converted Warrants”). As a result of the Share Exchange and the issuance of the Substitute Options and the Converted Warrants, VAC became a wholly-owned subsidiary of VC, and VAC’s shareholders owned on July 12, 2013 approximately 91% of VC’s common stock, on an as converted, fully diluted basis (including outstanding stock options and warrants).
Based on the terms of the transaction, VAC was the accounting acquirer and as a result VAC’s operating results became the historical operating results of the Company. In addition, VAC’s common stock has been presented as if it was converted into shares of VC’s common stock at the beginning of the periods presented herein and based on the exchange ratio under the terms of the Exchange Agreement, which was 0.19083. The exchange ratio took into consideration the Reverse Stock Split, which is more fully discussed below.
The Series C Preferred Stock consisted of 500,000 authorized shares, 410,759 of which were issued and outstanding through October 17, 2013. The shares of Series C Preferred Stock issued to VAC’s shareholders in connection with the Share Exchange, by their principal terms:
(a)
|
converted into a total of 8,215,184 Conversion Shares, constituting approximately 88% of the issued and outstanding shares of common stock of VC, following the Reverse Stock Split on October 18, 2013 (as more fully discussed below);
|
(b)
|
had the same voting rights as holders of VC’s common stock on an as-converted basis for any matters that are subject to stockholder vote;
|
(c)
|
were not entitled to any dividends; and
|
(d)
|
were to be treated pari passu with the common stock on liquidation, dissolution or winding up of VC.
|
On July 12, 2013, VC obtained approval from a majority of its shareholders for and to effect a one for thirty (1:30) reverse stock split (the “Reverse Stock Split”). On October 18, 2013, VC filed a Certificate of Amendment to its Certificate of Incorporation with the Secretary of State of the State of Delaware to effect the Reverse Stock Split. The Reverse Stock Split became effective on October 18, 2013. The Reverse Stock Split caused the total number of shares of common stock outstanding, including the shares underlying the Series C Preferred Stock, to equal 9,302,674 shares of VC common stock based on the shares outstanding on October 18, 2013. The Reverse Stock Split did not affect the number of shares of VC’s authorized common stock, which remain at 50 million shares.
As a result of the Reverse Stock Split, all share information in this Quarterly Report has been restated to reflect the Reverse Stock Split as if it had occurred at the beginning of the periods presented, where appropriate.
In connection with the Share Exchange, Digital Angel Corporation changed its name to VeriTeQ Corporation effective October 18, 2013.
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.
Letter Agreement with Digital Angel Radio Communications Limited. (DARC)
On January 30, 2014, we and the buyers of Digital Angel Radio Communications Limited, or DARC (a former wholly-owned subsidiary operating in the United Kingdom), entered into a letter agreement under which we agreed to accept a payment of £62,000 (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 recorded a loss of approximately USD $56,000 in the three-months ended March 31, 2014. The loss is included in other expense in our condensed consolidated statement of operations. All other provisions (including, without limitation, the indemnities) agreed between VC, and/or the buyers under the stock purchase agreement and any related documents remain in full force and effect.
Summary of Significant Accounting Policies
Principles of Consolidation
The financial statements include our accounts and the accounts of our subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
Classification of Expenses
For comparative purposes, we have reclassified certain expenses related to the development of our products from selling, general and administrative expenses to development expenses in the historical financial statement presented herein.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) in the United States of America (“U.S.”) requires management to make certain estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates are based on the knowledge of current events and actions we may undertake in the future, they may ultimately differ from actual results. Included in these estimates are assumptions used in determining the lives of long-lived assets, in Black-Scholes-Merton (“BSM”) valuation models in estimating the fair value of stock-based compensation and warrants, promissory notes with an embedded convertible option and royalty obligations and in determining valuation allowances for intangible assets, deferred tax assets, among others.
Concentration of Credit Risk
We maintained our domestic cash in one financial institution during the three-months ended March 31, 2014. Balances were insured up to Federal Deposit Insurance Corporation limits of $250,000 per institution. At times, cash balances may exceed the federally insured limits.
Other Current Assets
Other current assets consist of prepaid fees for investor relation services, prepaid insurance and other receivables. At March 31, 2014, prepaid investor relation services fees amount to approximately $60 thousand. No items included in other current assets at March 31, 2014 and December 31, 2013 exceeded 5% of total current assets, respectively.
Inventory
Inventory consisted of purchased finished goods at March 31, 2014 and December 31, 2013. Inventory is valued at the lower of the value using the first-in, first-out (“FIFO”) cost method, or market.
Property and Equipment
Property and equipment, consisting primarily of computer equipment, and are stated at cost less accumulated depreciation. Depreciation expense is computed using the straight-line method over the estimated useful life of the related assets (generally three years for computer equipment and 10 years for other equipment). Depreciation expense for the three-months ended March 31, 2014 and 2013 was approximately $1 thousand 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 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 March 31, 2014.
Revenue Recognition
Product revenue is recognized at the time product is shipped and title has transferred, provided that a purchase order has been received or a contract has been executed, there are no uncertainties regarding customer acceptance, the sales price is fixed and determinable and collectability is deemed probable. If uncertainties regarding customer acceptance exist, we intend to recognize the revenue when such uncertainties are resolved. There are no significant post-contract support obligations at the time of revenue recognition. Our accounting policy regarding vendor and post contract support obligations is based on the terms of the customers’ contracts and is billable upon occurrence of the post-sale support. Currently, there are no multiple element arrangements in connection with our product sales. Cost of products sold is recorded as the related revenue is recognized. We offer a warranty on our products and record a liability for product warranties at the time it is probable that a warranty liability has been incurred and the amount of loss can reasonably be estimated. To date, we have not incurred a warranty liability on products we have sold. It is our policy to approve all customer returns before issuing credit to the customer.
Stock-Based Compensation
At March 31, 2014, we had five stock-based employee compensation plans which are more fully described in Note 7 to our consolidated financial statements included in our Annual Report on Form 10-K filed with the SEC on April 15, 2014. In accordance with the Compensation – Stock Compensation Topic of the Codification, awards granted are valued at fair value and compensation cost is recognized on a straight line basis over the service period of each award.
Income Taxes
We recognize deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statement or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Temporary differences between taxable income reported for financial reporting purposes and income tax purposes consist primarily of timing differences such as amortization of intangible assets, deferred officers' compensation and stock-based compensation. A valuation allowance is provided against net deferred tax assets where we determine realization is not currently judged to be more likely than not. We recognize and measure uncertain tax positions through a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. We consider many factors when evaluating and estimating tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes. Accordingly, we report a liability for unrecognized tax benefits resulting from the uncertain tax positions taken or expected to be taken in a tax return and recognize interest and penalties, if any, related to uncertain tax positions in income tax expense.
Income (Loss) Per Common Share and Common Share Equivalent
Basic and diluted income (loss) per common share has been computed by dividing the income (loss) by the weighted average number of common shares outstanding. For the three-months ended March 31, 2014, diluted income per common share has 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 and warrants to the extent that the average fair value of our common stock for each period is greater than the exercise/conversion price of the options and warrants, plus the incremental shares issuable upon the conversion of convertible notes payable to the extent that such conversion is dilutive to our earning per share. Since we incurred a net loss for the three-months ended March 31, 2013, diluted loss per common share for that period has not been computed by giving effect to all potentially dilutive common shares that were outstanding during the period since to do so would have been anti-dilutive. See Note 9 for the computation of basic and diluted income (loss) per share.
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”).
2. Acquisition
Acquisition
|
|
Dates
Acquired
|
|
Acquisition
Price
|
|
|
Intangible
Assets
Acquired
|
|
Description of Assets
|
(in thousands)
|
VeriTeQ Corporation
|
|
7/08/13
|
|
$
|
935
|
|
|
$
|
—
|
|
Cash, marketable securities and receivables, among others
|
Acquisition of VeriTeQ Corporation under Share Exchange Agreement
Given VAC’s former shareholders’ ownership in VC, as a result of the Exchange Agreement, VAC was considered to be the acquirer for accounting purposes and the transaction was accounted for as a reverse acquisition of VC by VAC under the accounting rules for business combinations. Accordingly, VC’s assets and liabilities were recorded at their estimated fair values to the extent they were deemed to have been acquired for accounting purposes and VC has established a new basis for its assets and liabilities based upon the fair values thereof and the value of VC’s shares outstanding on July 8, 2013, the Closing Date.
The results of VC have been included in the consolidated statements of operations since July 8, 2013, the date of acquisition. Unaudited pro forma results of operations for the three-months ended March 31, 2013 are included below. Such pro forma information assumes that the VC acquisition had occurred as of January 1, 2013. This summary is not necessarily indicative of what our result of operations would have been had VC been a combined entity during such period, nor does it purport to represent results of operations for any future periods.
(In thousands, except per share amounts)
|
|
Three-Months
Ended March 31,
2013
|
|
Net operating revenue
|
|
$
|
—
|
|
Loss from continuing operations
|
|
$
|
(1,651)
|
|
Loss per common share from continuing operations– basic and diluted
|
|
$
|
(0.18)
|
|
3. Intangible Assets
Intangibles and other assets consist of the following:
|
|
March 31,
2014
|
|
|
December 31,
2013
|
|
|
Lives
(in years)
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
|
|
|
|
Technology, net of accumulated amortization of $750 and $627
|
|
$
|
6,121
|
|
|
$
|
6,244
|
|
|
|
14
|
|
Customer relationship, net of accumulated amortization of $159 and $141
|
|
|
341
|
|
|
|
359
|
|
|
|
7
|
|
Trademarks, net of accumulated amortization of $43 and $35
|
|
|
407
|
|
|
|
415
|
|
|
|
14
|
|
|
|
$
|
6,869
|
|
|
$
|
7,018
|
|
|
|
|
|
Amortization of intangibles charged against income amounted to $0.1 million and $0.1 million for the three-months ended March 31, 2014 and 2013, respectively.
4. Accrued Expenses
The following table summarizes the significant components of accrued expenses:
|
|
March 31,
2014
|
|
|
December 31,
2013
|
|
|
|
(in thousands)
|
|
Accrued payroll and payroll related
|
|
$
|
1,976
|
|
|
$
|
1,734
|
|
Accrued legal
|
|
|
453
|
|
|
|
445
|
|
Accrued other expenses
|
|
|
847
|
|
|
|
539
|
|
Total accrued expenses
|
|
$
|
3,276
|
|
|
$
|
2,718
|
|
5. Notes Payable and Restricted Cash
November 2013 Financing Transaction
On November 13, 2013, we entered into the securities purchase agreement (the “Purchase Agreement”) with a group of institutional investors (the “Investors”), relating to the private placement of approximately $1,816,667 in principal amount of senior secured convertible promissory 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.
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, or the 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”).
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 totaled approximately $0.9 million at March 31, 2014. On April 3, 2014, to provide the Company with additional liquidity, several of the investors transferred approximately $145,000 of the restricted funds to our operating account. Therefore, the balance in the restricted accounts aggregates approximately $0.7 million as of May 12, 2014.
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. 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 consists of the following (in thousands):
|
|
March 31,
2014
|
|
|
December 31,
2013
|
|
|
|
(in thousands)
|
|
Note originally with PSID for $200 dated January 11, 2012, bore interest at 5% per annum, was originally payable in monthly instalments beginning January 11, 2013 through December 11, 2014. Note was amended in July 2013 to allow for conversion into common stock and extend payment terms. After the note was partially converted into common stock in October 2013, PSID assigned the note to a group of lenders in November 2013. One of the lenders converted $60 of the note and $10 of accrued interest into 47 shares of common stock in February 2014. The Company issued warrants to acquire 300 shares of its common stock to PSID in connection with a letter agreement entered into in November 2013(2)(3)
|
|
$
|
115
|
|
|
$
|
175
|
|
Demand note for $80 issued October 11, 2013 to our CEO, bears interest at 5% per annum, partially repaid in November 2013 and February 2014(1)
|
|
|
5
|
|
|
|
30
|
|
Demand note for $30 issued October 29, 2013 to our CEO, bears interest at 5% per annum (1)
|
|
|
30
|
|
|
|
30
|
|
Senior Secured Convertible Notes issued November 13, 2013 for $1,817, net of discount of $1,131 and $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)
|
|
|
686
|
|
|
|
232
|
|
Demand note for $60 issued January 8, 2014 to Michael Krawitz, our CFO, bears interest at 5% per annum (1)
|
|
|
60
|
|
|
|
—
|
|
Demand note for $60 issued January 16, 2014 to our CEO, bears interest at 5% per annum (1)
|
|
|
60
|
|
|
|
—
|
|
Demand note for $40 issued January 16, 2014 to our President, bears interest at 5% per annum (1)
|
|
|
40
|
|
|
|
—
|
|
Note for $175 issued on February 4, 2014 to Corbin Properties LLC, bears interest at 10% per annum, due February 4, 2015
|
|
|
175
|
|
|
|
—
|
|
Demand note for $25 issued March 4, 2014 to a Director, bears interest at 5% per annum (1)
|
|
|
25
|
|
|
|
—
|
|
Note for $25 issued March 5, 2014 to Deephaven Enterprises, Inc., bears interest at 9% per annum, due March 5, 2015.
If certain future events occur, the note becomes convertible at a price of $0.35 per share.
|
|
|
25
|
|
|
|
—
|
|
Note for $25 issued on March 6, 2014, to James Rybicki Trust, bears interest at 9% per annum, due March 6, 2015.
If certain future events occur, the note becomes convertible at a price of $0.35 per share.
|
|
|
25
|
|
|
|
—
|
|
Note for $25 issued on March 10, 2014, to William Caragol, bears interest at the rate of 9% per annum, due March 10, 2015.
If certain future events occur, the note becomes convertible at a price equal to 60% of the lowest closing bid price over the 10-trading days immediately preceding a conversion notice.
|
|
|
25
|
|
|
|
—
|
|
Note for $61 issued on March 20, 2014 to Deephaven Enterprises, Inc., bears interest at the rate of 9% per annum, due March 20, 2015.
If certain future events occur, the note becomes convertible at a price of $0.35 per share, existing outstanding common stock warrants held by the holder become exercisable at $0.35 per share and an additional 300 warrants to acquire shares of the Company’s common stock with an exercise price of $0.35 per share will be granted.
|
|
|
61
|
|
|
|
—
|
|
Total notes payable
|
|
|
1,332
|
|
|
|
467
|
|
Less: Current maturities
|
|
|
(1,332
|
)
|
|
|
(467
|
)
|
|
|
|
|
|
|
|
|
|
Note payable long-term
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated Convertible Note Payable elected at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing subordinated convertible note payable with a principal amount of $3,300 dated December 3, 2012. Note is convertible into common stock equal to 1/3 of the shares beneficially held by the CEO on the date of conversion. Note was amended in July 2013 to extend the maturity date to June 2015. The note was recorded at its fair value and will be revalued at each reporting period with changes in the fair value recorded as other expense/income.
|
|
$
|
2,493
|
|
|
$
|
4,925
|
|
(1) These notes have been issued to related parties. See Note 10.
(2) The warrants are more fully described in Note 7.
(3) This note when originally issued was issued to a related party. See Note 10.
Interest expense was approximately $0.5 million and $0.2 million for the three-months ended March 31, 2014 and March 31, 2013, respectively, the majority of which is due to the accretion of debt discounts. Due to the accretion of debt discounts during the periods, the weighted average interest rates are not meaningful numbers.
See Note 14 for promissory notes issued subsequent to March 31, 2014.
6. Financial Instruments
Fair Value Measurements
We define fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, which are required to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as inherent risk, transfer restrictions and credit risk.
We apply the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Inputs that are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.
During the three-months ended March 31, 2014, the subordinated convertible note, which has a convertible option embedded in the note, warrant liabilities and the contingent royalty obligations, which relate to assets acquisitions during 2012, were valued using Level 3 inputs, and for the three-months ended March 31, 2013, the subordinated convertible note and the contingent royalty obligations were valued using Level 3 inputs. The changes in fair value of the subordinated convertible note and the warrant liabilities during the three-months ended March 31, 2014 and 2013 are reflected in other income (expense) for each period. There was no change in the estimated fair value of the contingent royalty obligations during the three-months ended March 31, 2014 and 2013.
Notes Payable and Long-Term Debt
We have valued the subordinated convertible note based on the market value of the shares of our common stock into which it is convertible at March 31, 2014 and December 31, 2013.
Warrant Liabilities
The carrying amounts approximate management’s estimate of the fair value of the warrant liabilities at March 31, 2014 based on the BSM valuation model and using the following assumptions: expected term of 4.62 years, expected volatility of 161%, risk-free interest rates of 1.73%, 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 March 31, 2014 and December 31, 2013 (in thousands):
|
|
March 31, 2014
|
|
|
December 31, 2013
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated convertible note with an embedded conversion option
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,493
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,925
|
|
Warrant liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,991
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,114
|
|
Royalty obligations
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,000
|
|
The following is a summary of activity of Level 3 liabilities for the three-months ended March 31, 2014 (in thousands):
|
|
Subordinated
Note with
Convertible
Option
|
|
|
Warrant
Liabilities
|
|
|
Estimated
Royalty
Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2013
|
|
$
|
4,925
|
|
|
$
|
6,114
|
|
|
$
|
4,000
|
|
Change in fair value
|
|
|
(2,432
|
)
|
|
|
(3,123
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at March 31, 2014
|
|
$
|
2,493
|
(1)
|
|
$
|
2,991
|
|
|
$
|
4,000
|
(2)
|
(1) The principal balance at December 31, 2013 and March 31, 2014 is $3.3 million. See Note 5 for additional information regarding the note.
(2) Includes $160 thousand of current royalty obligations in account payable and accrued expenses at March 31, 2014.
The Company’s management considers the carrying values of other current assets and other current liabilities to approximate fair values primarily due to their short-term nature.
7. Stockholders’ Deficit
Preferred Stock
As of March 31, 2014, the Company has authorized 5,000,000 shares of preferred stock, par value $10.00 per share of which 500,000 shares were authorized as Series C Preferred Stock. The Series C Preferred Stock is more fully described in Note 1. No shares of preferred stock were outstanding as of March 31, 2014.
Common Stock
At March 31, 2014, VC had authorized 50.0 million shares of common stock of which approximately 9.9 million were issued and outstanding. Of the 9.9 million issued and outstanding shares of common stock at March 31, 2014, 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
March 31,
2014
|
|
|
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
|
|
|
|
(95
|
)
|
|
|
3,285
|
|
|
|
|
|
|
|
|
|
The Series A warrant was issued in connection with a stock subscription agreement to an investor. The Series A warrants was exercised in February 2014 under the cashless exercise provisions of the warrants.
The Series B, C, D, E, F, G and H warrants were issued in connection with promissory notes. 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. The promissory notes were converted into common stock during 2013.
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 to our consolidated financial statements included in our Annual Report on Form 10-K filed with the SEC on April 15, 2014. The terms of the Series VTb warrants are identical to the Series VTa warrants. The VTa and VTb warrants are classified as liabilities at March 31, 2014 and December 31, 2013.
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
We had stock-based employee plans outstanding as of March 31, 2014, which are more fully described in Note 7 to our consolidated financial statements included in our Annual Report on Form 10-K filed with the SEC on April 15, 2014.
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 amortized to expense over the expected performance or service periods using the straight-line attribution method. During the three-months ended March 31, 2014 we did not grant any stock options and during the three-months ended March 31, 2013, we granted 1.0 million options. The weighted average fair value of the options granted during the three-months ended March 31, 2013 was $1.33 per share.
The weighted average values of the assumptions used to value the options granted in the three-months ended March 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 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 was estimated based on the historical volatility of similar companies’ common stock. The risk free interest rate was 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 was 0% based on the fact that we have never paid dividends and we have no present intention to pay dividends.
During the three-months ended March 31, 2014, we did not record any compensation expense associated with stock options as they were all fully vested on or before January 1, 2014. During the three-months ended March 31, 2013, we recorded approximately $0.2 million 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 the three-months ended March 31, 2014 is as follows (shares in thousands):
|
|
Stock
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Contractual
Term
(years)
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at January 1, 2014
|
|
|
2,628
|
|
|
$
|
9.01
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(382
|
)
|
|
|
0.05
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(8
|
)
|
|
|
663.14
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2014
|
|
|
2,238
|
|
|
|
8.13
|
|
|
|
4.89
|
|
|
$
|
972,000
|
*
|
Vested or expected to vest at March 31, 2014
|
|
|
2,238
|
|
|
|
8.13
|
|
|
|
4.89
|
|
|
$
|
972,000
|
*
|
Shares available on March 31, 2014 for options that may be granted
|
|
|
2,508
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
The intrinsic value of a stock option is the amount by which the market value of the underlying stock exceeds the exercise price of the option. The market value of our common stock was $1.16 per share at March 31, 2014.
There were 0.4 million stock options exercised during the three months ended March 31, 2014 with a total intrinsic value of $0.4 million. No stock options were exercised during the three-months ended March 31, 2013. The total fair value of options vested during the three-months ended March 31, 2014 and 2013, was approximately $1.4 million and $0.4 million, respectively. As of March 31, 2014, there was no unrecognized compensation cost related to stock options granted 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 three-months ended March 31, 2014 and 2013, we recorded $0.2 million and $0.1 million, respectively, in compensation expense related to the restricted stock.
8. Income Taxes
We did not have an income tax provision for the three-months ended March 31, 2014 and 2013. The income tax benefit of $0.8 million for the period from December 31, 2011 (Inception) to March 31, 2014 resulted from the utilization of deferred tax assets to offset a deferred tax liability associated with an acquisition we made in January 2012. We have incurred accumulated losses and therefore have provided a valuation allowance against our net operating loss carryforwards and other net deferred tax assets.
At March 31, 2014, we had estimated U.S. net operating loss carryforwards of approximately $6.0 million for income tax purposes, which expire in varying amounts through early 2034. 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.
9. Income (Loss) Per Share
A reconciliation of the numerator and denominator of basic and diluted income (loss) per share is provided as follows, in thousands, except per share amounts:
|
|
Three-Months
Ended March 31,
2014
|
|
|
Three-Months
Ended March 31,
2013
|
|
Numerator for basic income (loss) per share:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
3,555
|
|
|
$
|
(1,310
|
)
|
Basic weighted-average shares outstanding
(1)
|
|
|
9,599
|
|
|
|
7,772
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per share – basic
|
|
$
|
0.37
|
|
|
$
|
(0.17
|
)
|
|
|
|
|
|
|
|
|
|
Numerator for diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
3,555
|
|
|
|
(1,310
|
)
|
Deduct other income associated with the revaluation of convertible promissory note with embedded conversion option
|
|
|
(2,432
|
)
|
|
n/a
|
|
Net income (loss) for diluted calculation
|
|
$
|
1,123
|
|
|
$
|
(1,310
|
)
|
|
|
|
|
|
|
|
|
|
Denominator for diluted income (loss) per share:
|
|
|
|
|
|
|
|
|
Basic weighted-average shares outstanding
|
|
|
9,599
|
|
|
|
7,772
|
|
Stock options
|
|
|
1,096
|
|
|
__
|
|
Warrants
|
|
|
40
|
|
|
__
|
|
Shares issuable upon conversion of convertible promissory notes
|
|
|
2,266
|
|
|
__
|
|
Diluted weighted-average shares outstanding
(2)
|
|
|
13,001
|
|
|
|
7,772
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per share – diluted
|
|
$
|
0.09
|
|
|
$
|
(0.17
|
)
|
|
(1)
|
Basic income (loss) per common share has been computed by dividing the income (loss) by the weighted average number of common shares outstanding.
|
|
(2)
|
Diluted income per common share for the three-months ended March 31, 2014 has 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 and warrants to the extent that the average fair value of our common stock for each period was greater than the exercise/conversion price of the options and warrants plus the incremental shares issuable upon the conversion of convertible notes payable to the extent that such conversion is dilutive to our earning per share. For the three-months ended March 31, 2014 and March 31, 2013, the following stock options and warrants and shares issuable upon conversion of convertible notes payable outstanding during the periods were not included in the computation of dilutive loss per share because the net effect would have been anti-dilutive:
|
|
|
March 31,
2014
|
|
|
March 31,
2013
|
|
|
|
(in thousands)
|
|
Stock options
|
|
|
1,361
|
|
|
|
2,634
|
|
Warrants
|
|
|
3,285
|
|
|
|
258
|
|
Shares issuable upon conversion of convertible notes payable
|
|
|
2,422
|
|
|
|
2,359
|
|
|
|
|
7,068
|
|
|
|
5,251
|
|
In addition to the shares listed in the table above, the Company has contingently-issuable shares of common stock pursuant to the terms of seven promissory notes, four of which are discussed more fully Note 5 and three of which are discussed more fully in Note 14. As of May 12, 2014, none of the contingencies pursuant to the promissory notes were met. If such contingency is met, the aggregate number of common stock and warrants to acquire common stock that would be issued, based on the market price of the Company’s common stock on May 12, 2014, is approximately 1.1 million shares. Also, the Company has entered into two agreements with investor relations firms under which the Company has agreed to issue shares of its common stock. However, to the extent that the issuances of such shares would cause a reset under the terms of the Warrants, one of the investor relationship firms has agreed to postpone the requirement that the Company issue its common stock until such time as the issuance would not cause a reset. Shares of common stock issuable under this agreement total 100 thousand. Under the term of the second agreement, the Company has accrued the value of the common stock required to be issued as of March 31, 2014, or $54 thousand. The Company currently intends, so long as issuing shares of its common stock would cause a reset under the terms of the Warrants, to satisfy the obligation to the second firm in cash, when such cash becomes available.
10. Related Party Transactions
As of March 31, 2014, we have entered into notes payable with related parties and a shared services agreement and letter agreements with a former related party. In addition, in June 2013, we sold common stock to a member of our board of directors. Each of these transactions is more fully described in Notes 10 and 14 to our consolidated financial statements included in our Annual Report on Form 10-K filed with the SEC on April 15, 2014. Certain of the related-party notes payable are also discussed in Note 5.
Accrued Expenses
Included in accrued expenses at March 31, 2014 and December 31, 2013 are approximately $1.8 million and $1.6 million, respectively, owed to the Company's corporate officers and directors.
11. Commitments and Contingencies
We have entered into employment agreements with Mr. Scott Silverman, our Chief Executive Officer, Mr. Randolph Geissler, our President and Mr. Michael Krawitz our Chief Legal and Financial Officer. Messrs. Silverman and Geissler’s employment agreements are discussed in Note 11 and Mr. Krawitz’ employment agreement is discussed in Note 14 to our consolidated financial statements included in our Annual Report on Form10-K filed with the SEC on April 15, 2014. No changes were made to these agreements during the three-months ended March 31, 2014.
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. $0.4 million). This claim is associated with an outsourced manufacturing agreement related to a terminated manufacturing contract. As a result of the termination of the contract, Signature did not purchase any product under the manufacturing agreement and, accordingly, VC, in consultation with outside legal counsel, does not believe that any amount is owed per the terms of the agreement. However, this claim could result in VC having to pay an additional estimated portion of Signature’s outstanding liabilities. We expect the liquidation to be completed by the middle of 2014, although it could extend beyond the expected timeframe.
12. Legal Proceedings
We have been informed by the New Jersey Department of Environmental Protection that a predecessor business sold a building in 2006 for which an environmental action has been claimed. The claim is being reviewed by the Company’s outside legal counsel. We have not yet determined the impact on our financial condition or cash flows, if any.
13. Supplemental Cash Flow Information
We had the following non-cash operating, investing and financing activities (in thousands):
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For the Three-
Months Ended
March 31, 2014
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For the Three-
Months Ended
March 31, 2013
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|
Non-cash operating activities:
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|
|
|
|
|
|
|
|
Royalty obligations now included in accrued expenses
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$
|
100
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|
|
|
—
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|
Non-cash investing and financing activities:
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|
|
|
|
|
|
|
|
Issuance of common stock in full payment of note payable and accrued interest
|
|
|
—
|
|
|
|
131
|
|
Issuance of common stock in partial payment of note payable and accrued interest
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|
|
70
|
|
|
|
—
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14. Subsequent Events
Promissory Notes
We have entered into the following promissory notes subsequent to March 31, 2014:
On April 16, 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 April 16, 2015, bears interest at the rate of 9% per annum and can be prepaid without penalty.
If certain future events occur, the note becomes convertible as follows: (i) if notice given by holder, at a price equal to 60% of the lowest closing bid price over the 15-trading day immediately preceding a conversion notice, and (ii) if notice given by the Company, at a price of $0.35 per share.
On April 16, 2014, the Company entered into a promissory note with the Ned Siegel wherein Mr. Siegel loaned the Company the principal amount of $30,000. The note matures on April 16, 2015, bears interest at the rate of 9% per annum and can be prepaid without penalty.
If certain future events occur, the note becomes convertible at a price of $0.35 per share.
On May 1, 2014, the Company entered into a promissory note with the Ned Siegel wherein Mr. Siegel loaned the Company the principal amount of $20,000. The note matures on May 1, 2015, bears interest at the rate of 9% per annum and can be prepaid without penalty.
If certain future events occur, the note becomes convertible at a price of $0.35 per share and warrants to acquire 100,000 shares of the Company’s common stock with an exercise price of $0.35 per share will be granted.