UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
8-K
CURRENT
REPORT
Pursuant
to Section 13 or 15(d) of the
Securities
Exchange Act of 1934
Date of Report (Date of earliest event
reported): May 6, 2016
VERITEQ
CORPORATION
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(Exact
name of registrant as specified in its charter)
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Delaware
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000-26020
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43-1641533
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(State
or other jurisdiction
of
incorporation)
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(Commission
File
Number)
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(I.R.S.
Employer
Identification
No.)
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6560
W Rogers Circle
Suite
19, Boca Raton, Florida
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33487
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s telephone number,
including area code: (954) 574-9720
(Former
name or former address, if changed since last report.)
Check
the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant
under any of the following provisions:
☐
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
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☐
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
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☐
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
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☐
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13a-4(c))
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TABLE
OF CONTENTS
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
Current Report contains forward-looking statements, including, without limitation, in the sections captioned “Description
of Business,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and
Plan of Operations,” and elsewhere. Any and all statements contained in this Report that are not statements of historical
fact may be deemed forward-looking statements. Terms such as “may,” “might,” “would,” “should,”
“could,” “project,” “estimate,” “pro-forma,” “predict,” “potential,”
“strategy,” “anticipate,” “attempt,” “develop,” “plan,” “help,”
“believe,” “continue,” “intend,” “expect,” “future,” and terms of
similar import (including the negative of any of the foregoing) may be intended to identify forward-looking statements. However,
not all forward-looking statements may contain one or more of these identifying terms. Forward-looking statements in this Report
may include, without limitation, statements regarding (i) the plans and objectives of management for future operations, (ii) a
projection of income (including income/loss), earnings (including earnings/loss) per share, capital expenditures, dividends, capital
structure or other financial items, (iii) our future financial performance, including any such statement contained in a discussion
and analysis of financial condition by management or in the results of operations included pursuant to the rules and regulations
of the SEC, and (iv) the assumptions underlying or relating to any statement described in points (i), (ii), or (iii) above.
Readers
are cautioned not to place undue reliance on forward-looking statements because of the risks and uncertainties related to them
and to the risk factors. We disclaim any obligation to update the forward-looking statements contained in this Report to reflect
any new information or future events or circumstances or otherwise.
Readers
should read this Report in conjunction with the discussion under the caption “Risk Factors,” our financial statements
and the related notes thereto in this Report, and other documents which we may file from time to time with the Securities and
Exchange Commission (the “SEC”).
The
forward-looking statements are not meant to predict or guarantee actual results, performance, events or circumstances and may
not be realized because they are based upon our current projections, plans, objectives, beliefs, expectations, estimates and assumptions
and are subject to a number of risks and uncertainties and other influences, many of which we have no control over. Actual results
and the timing of certain events and circumstances may differ materially from those described by the forward-looking statements
as a result of these risks and uncertainties. Factors that may influence or contribute to the inaccuracy of the forward-looking
statements or cause actual results to differ materially from expected or desired results may include, without limitation, our
inability to obtain adequate financing, the significant length of time and resources associated with the development of our products
and services and related insufficient cash flows and resulting illiquidity, our inability to expand our business, significant
government regulation of our industry, existing or increased competition, results of arbitration and litigation, stock volatility
and illiquidity, and our failure to implement our business plans or strategies. A description of some of the risks and uncertainties
that could cause our actual results to differ materially from those described by the forward-looking statements in this Report
appears in the section captioned “Risk Factors” and elsewhere in this Report and include the following:
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Our ability to
execute our business plan;
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Our
ability to raise capital to develop our business and fund our operations;
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Difficulties
we may experience in building and operating key elements of our technical infrastructure;
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Our
ability to adopt technology in response to changing security needs and to secure and
safeguard client accounts;
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Our
failure to protect our intellectual property and our ability to operate without infringing
on the intellectual property rights of others;
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Uncertainties relating to interpretation and enforcement
of legislation governing direct selling in certain jurisdictions;
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Our dependence on increased penetration of existing
markets;
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Contractual limitations on our ability to expand our
business;
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Our reliance on our information technology infrastructure
and outside service providers and manufacturers;
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The sufficiency of intellectual property rights;
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Changes in tax laws, treaties or regulations, or their
interpretation;
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Share price volatility related to, among other things,
speculative trading and certain traders shorting our common shares;
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Our increased risks, uncertainties, expenses and difficulties
as a growing company;
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Our reliance on our manufacturers;
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Our dependence on our website and popular search engines
to generate sales; and
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The need to attract and retain personnel.
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EXPLANATORY
NOTE
We
were originally incorporated under the laws of the State of Missouri on May 11, 1993 under the name Digital Angel Corporation,
and effective April 20, 2007, we reincorporated in the state of Delaware. On October 18, 2013 we changed our name from Digital
Angel Corporation to VeriTeQ Corporation.
We
were previously engaged in the business of radio frequency identification technologies (“RFID”) for the Unique Device
Identification (“UDI”) of implantable medical devices and, subject to funds becoming available, radiation dose measurement
technologies for use in radiation therapy treatment. From inception through November 3, 2015, we generated minimal sales revenue
and our operations were subject to all the risks inherent in the establishment of a new business enterprise. Our failure to timely
file our Quarterly Report on Form 10-Q with the SEC in August of 2015, as well as our failure to pay certain indebtedness that
became due, constituted events of default on our outstanding convertible promissory notes, including approximately $1.0 million
of senior secured promissory notes secured by substantially all of our assets, and $1.3 million of convertible promissory of notes
that were pari passu in rank and priority to the senior secured promissory notes (collectively, the "Senior Notes”).
On
October 19, 2015, we received a default notice from the collateral agent under the security agreement pertaining to the Senior
Notes. The default notice demanded repayment of the entire amount due under the Senior Notes, and we did not have the financial
resources to repay this indebtedness. We also received a Notification of Disposition of Collateral (the “NDC”). The
NDC advised the Company that the collateral agent intended to sell, lease or license the assets securing the Senior Notes at a
public auction to take place in early November 2015. These assets comprised substantially all of the assets of the Company and
its subsidiaries, except for the assets described below. On November 4, 2015, the public auction took place, and the holder of
a substantial portion of the Senior Notes purchased the assets, including the capital stock of our VeriTeQ Acquisition Corp. and
PositiveID Animal Health subsidiaries, for $1 million, which was credited against the Company’s outstanding indebtedness
to the holder of the Senior Notes.
In
October of 2015, we contacted the holder of a subordinated convertible promissory note (the “SNC Note”) regarding
the possibility of returning the assets securing the SNC Note, consisting primarily of intellectual property and certain tangible
property and equipment related to radiation dose measurement technologies (the “SNC Collateral”), to the holder in
satisfaction of the SNC Note. By letter agreement dated February 18, 2016, we agreed to return the SNC Collateral to the holder
of the SNC Note, and the holder agreed to discharge the Company of all of its obligations and liabilities under the SNC Note upon
receipt of the SNC Collateral.
Since
November 4, 2015, we have not engaged in any operations and our business has been dormant. As such, we have been a “shell”
company, as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
As previously reported,
on November 25, 2015, we executed a Stock Purchase Agreement (the “Stock Purchase Agreement”) of the same date among
us, Mrs. Lynne Shapiro, and Brace Shop, LLC, a Florida limited liability company (“Brace Shop”), pursuant to which
Brace Shop became a wholly-owned subsidiary of ours on May 6, 2016 (the “Reverse Merger”). In the Reverse Merger, we
purchased all of the outstanding membership interests of Brace Shop from Mrs. Lynne Shapiro, and in exchange, we paid (i) $250,000
in cash to Mrs. Lynne Shapiro, (ii) 849 shares of our newly designated Series E Convertible Preferred Stock (“
Series E
Preferred Stock
”), which is convertible into 84.9% of the issued and outstanding shares of our common stock, par value
$0.00001 (the “Common Stock”), on a fully diluted basis, and has voting rights on an as converted basis and (iii) a
goldenshare in the form of a 5-year warrant (the “Goldenshare”), exercisable at $0.00001 per share with a cashless
exercise provision for that number of shares of Common Stock required to insure that the Series E Preferred Stock issued as part
of the purchase price to Mrs. Lynne Shapiro is convertible into 84.9% of the issued and outstanding shares of Common Stock, on
a fully diluted basis. At the closing of the Reverse Merger, VeriTeQ Corporation’s former Chief Executive Officer will receive
39 shares of the Series E Preferred Stock convertible into 3.9% of the issued and outstanding Common Stock on a fully-diluted basis.
The shares of Series E Preferred Stock and the Goldenshare shall not be convertible until the six (6) month anniversary of the
Closing of the Reverse Merger. Further, once a majority of the outstanding Series E Preferred Stock has been converted into Common
Stock, then any other Series E Preferred Stock then outstanding shall automatically be deemed converted into Common Stock on the
fifth business day following the date that a majority of the outstanding Series E Preferred Stock is converted into Common Stock.
In accordance with “reverse
acquisition” accounting treatment, the Brace Shop historical financial statements as of period ends, and for periods ended,
prior to the acquisition will become the historical financial statements of VeriTeQ prior to the Reverse Merger in all future
filings with the Securities and Exchange Commission (the “SEC”).
As
used in this Current Report, unless otherwise stated or the context clearly indicates otherwise, the terms the “Company,”
the “Registrant,” “we,” “us,” “our,” and “VeriTeQ” refer to VeriTeQ
Corporation, incorporated in Delaware, after giving effect to the Reverse Merger.
This
Current Report contains summaries of the material terms of various agreements executed in connection with the transactions described
herein. Such agreements are filed as exhibits hereto and incorporated herein by reference.
This
Current Report is being filed in connection with a series of transactions consummated by the Company and certain related events
and actions taken by the Company.
This
Current Report responds to the following Items in Form 8-K:
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Item 1.01
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Entry into a Material Definitive Agreement
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Item 2.01
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Completion of Acquisition or Disposition of Assets
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Item 3.02
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Unregistered Sales of Equity Securities
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Item 5.01
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Changes in Control of Registrant
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Item 5.02
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Departure of Directors or Certain Officers; Election
of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers
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Item 5.06
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Change in Shell Company Status
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Item 9.01
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Financial Statements and Exhibits
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ITEM 1.01
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ENTRY INTO A MATERIAL DEFINITIVE AGREEMENT.
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The
information contained in Item 2.01 below relating to the various agreements described therein is incorporated herein by reference.
ITEM 2.01
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COMPLETION OF ACQUISITION OR DISPOSITION OF ASSETS.
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THE
REVERSE MERGER AND RELATED TRANSACTIONS
Stock
Purchase Agreement
On November 25,
2015, our company, Brace Shop and Mrs. Lynne Shapiro entered into a Stock Purchase Agreement dated as of the same date (the “Stock
Purchase Agreement”), which closed on May 6, 2016 (the “Closing Date”). Pursuant to the terms of the Stock Purchase
Agreement, Brace Shop became a wholly-owned subsidiary of ours on May 6, 2016 (the “Reverse Merger”). In the Reverse
Merger, we purchased all of the outstanding membership interests of Brace Shop from Mrs. Lynne Shapiro, and in exchange, we paid
(i) $250,000 in cash to Mrs. Lynne Shapiro, (ii) 849 shares of
Series E Preferred Stock
, which is convertible into 84.9%
of the issued and outstanding shares of Common Stock on a fully diluted basis, and has voting rights on an as converted basis and
(iii) the Goldenshare, exercisable at $0.00001 per share with a cashless exercise provision for that number of shares of Common
Stock required to insure that the Series E Preferred Stock issued as part of the purchase price to Mrs. Lynne Shapiro is convertible
into 84.9% of the issued and outstanding shares of Common Stock, on a fully diluted basis. At the closing of the Reverse Merger,
VeriTeQ Corporation’s former Chief Executive Officer will receive 39 shares of the Series E Preferred Stock convertible into
3.9% of the issued and outstanding Common Stock on a fully-diluted basis. The shares of Series E Preferred Stock and the Goldenshare
shall not be convertible until the six (6) month anniversary of the Closing of the Reverse Merger. Further, once a majority of
the outstanding Series E Preferred Stock has been converted into Common Stock, then any other Series E Preferred Stock then outstanding
shall automatically be deemed converted into Common Stock on the fifth business day following the date that a majority of the outstanding
Series E Preferred Stock is converted into Common Stock.
Pursuant
to the Reverse Merger, we acquired the business of Brace Shop to establish our company as a provider of physical therapy and rehabilitation
equipment and products, including orthopedic braces.
The
Stock Purchase Agreement contained customary representations and warranties and pre- and post-closing covenants of each party
and customary closing conditions.
The
Reverse Merger will be treated as a recapitalization of Brace Shop for financial accounting purposes. Brace Shop will be considered
the acquirer for accounting purposes, and our historical financial statements before the Reverse Merger will be the consolidated
historical financial statements of Brace Shop in all future filings with the SEC.
The
Reverse Merger is intended to be treated as a tax-free reorganization under the Internal Revenue Code of 1986, as amended.
The
issuances of the Series E Preferred Stock and the Goldenshare in connection with the Reverse Merger were not registered under
the Securities Act of 1933, as amended (the “Securities Act”), in reliance upon the exemption from registration provided
by Section 4(a)(2) of the Securities Act, which exempts transactions by an issuer not involving any public offering, and/or Regulation
D promulgated by the SEC under that section. These securities may not be offered or sold absent registration or an applicable
exemption from the registration requirement, and some of these securities are subject to further contractual restrictions on transfer
as described below.
A
copy of the Stock Purchase Agreement was filed as Exhibit 10.1 to the Current Report we filed on December 2, 2015.
Departure
and Appointment of Directors and Officers
Our board of directors
currently consists of four members. On the Closing Date, Scott Silverman, our former Chairman of the Board, and Shawn Wooden, each
resigned their position as a director, and Lynne Shapiro was appointed to our board of directors.
Also on the Closing
Date, Marc Gelberg, our Interim Chief Financial Officer before the Reverse Merger, resigned from his position with the Company,
and Kenneth Shapiro was appointed as our Chief Financial Officer.
See
“Management – Directors and Executive Officers” below for information about our new directors and executive
officers.
Pro
Forma Ownership
Immediately after giving
effect to the Reverse Merger, there were 723,651 issued and outstanding shares of our Common Stock.
Following
the Reverse Merger, securities convertible into or exercisable or exchangeable for our Common Stock are outstanding as follows:
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Mrs.
Lynne Shapiro owns 849 shares of Series E Preferred Stock, which are convertible into
84.9% of our issued and outstanding capital stock on a fully-diluted basis
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Mrs. Lynn Shapiro owns the Goldenshare, which is exercisable
for the number of shares of Common Stock required to ensure that her 849 shares of Series E Preferred Stock shall always be convertible
into an aggregate of 84.9% of our then fully-diluted issued and outstanding capital stock.
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Scott R. Silverman owns 39 shares of Series E Preferred
Stock, which are convertible into 3.9% of our issued and outstanding capital stock on a fully-diluted basis.
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Sands Consults, LLC owns a warrant exercisable into
2.99% of our issued and outstanding capital stock.
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Former employees and directors of VeriTeQ Corporation
own options to purchase an aggregate of 123,500,000 shares of our Common Stock
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Convertible notes with an outstanding principal balance
of approximately $4.7 million, substantially all of which have full ratchet provisions.
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Full ratchet warrants which, as of December 31, 2015,
are exercisable into approximately 33.9 million shares of Common Stock
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Our
Common Stock is quoted on the OTC Pink under the trading symbol “VTEQ.”
Accounting
Treatment; Change of Control
The
Reverse Merger is being accounted for as a recapitalization of Brace Shop. Brace Shop is deemed to be the acquirer in the reverse
merger. Consequently, the assets and liabilities and the historical operations that are reflected in the financial statements
prior to the Reverse Merger will be those of Brace Shop and are recorded at the historical cost basis of Brace Shop, and the consolidated
financial statements after completion of the Reverse Merger will include the assets and liabilities of Brace Shop at historical
cost, the assets and liabilities of VeriTeQ Corporation at historical cost, and the historical operations of Brace Shop and the
operations of VeriTeQ Corporation from the Closing Date of the Reverse Merger.
The
Certificate of Designation of our Series E Preferred Stock grants the holders of Series E Preferred Stock the right to vote together
with the holders of Common Stock as a single class. As such, the 849 shares of Series E Preferred Stock issued to Lynne Shapiro
provide her with 84.9% of the voting power of the Company. Thus, the issuance of the 849 shares of Series E Preferred Stock pursuant
to the Reverse Merger resulted in a change in control of our company occurred as of the date of consummation of the Reverse Merger.
Except as described in this Current Report, no arrangements or understandings exist among present or former controlling stockholders
with respect to the election of members of our board of directors and, to our knowledge, no other arrangements exist that might
result in a change of control of our company.
We
continue to be a “smaller reporting company,” as defined under the Exchange, following the Reverse Merger.
A
copy of the Certificate of Designation of our Series E Preferred Stock is filed as Exhibit 3.1 of this Current Report.
DESCRIPTION
OF BUSINESS
OUR
BUSINESS
Overview
We
are a medical technology holding company that operates as an online retailer of orthopedic braces and physical therapy and rehabilitation
equipment through our wholly-owned subsidiary, Brace Shop. Brace Shop primarily distributes these products to the general public
through its website www.braceshop.com. Brace Shop also directly distributes products to a variety of customers in various industries
and fields, including healthcare professionals, hospitals, physical therapy and rehabilitation clinics, government institutions,
and school athletic programs.
OVERVIEW
OF THE MEDICAL SUPPLIES WHOLESALING INDUSTRY AND BRACE SHOP
Introduction
to the Medical Wholesaling Industry
Firms
operating in the Medical Supplies Wholesaling industry distribute dental and medical supplies and equipment intended to improve
or maintain health. Distribution and sale of orthopedic devices and hospital supplies account for 29.7% of the market segmentation.
In comparison, the distribution and sale of Electromedical Equipment and Surgical and Medical Instruments account for 28.8% and
28.1% of the market segmentation, respectively.
This
industry has exhibited robust revenue growth in the five years to 2015, in particular, demand for medical devices used in elderly
care has increased over this period and is expected to continue rising during the next five years. Over the past five years, industry
revenue is expected to increase at an annualized rate of 4.0% to total $163.9 billion, including a 4.1% increase during 2014.
Over the five years to 2019, IBISWorld expects industry revenue to grow at an average annual rate of 4.8% to $207.5 billion.
Demand
for medical care, supplies, and equipment is expected to rise rapidly as the US population ages. The number of Americans 65 and
older is expected to increase by 36 percent between 2015 and 2025, compared to an 8 percent increase in the population as a whole.
One of every five dollars spent in the US is anticipated to go to healthcare by 2020.
Corporate
History and Information
We
were originally incorporated under the laws of the State of Missouri on May 11, 1993 under the name Digital Angel Corporation,
and effective April 20, 2007, we reincorporated in the state of Delaware. On October 18, 2013 we changed our name from Digital
Angel Corporation to VeriTeQ Corporation.
As
a result of the Reverse Merger, we are the holding company for our wholly-owned subsidiary, Brace Shop. Brace Shop was formed
under the laws of the state of Florida in 2004. Brace Shop operates as an expanding online retailer of orthopedic braces and supports
in various categories such as knee, ankle, back, wrist, shoulder, elbow, foot and neck; physical therapy and rehabilitation equipment
such as hot and cold therapy, electric stimulation, medical tables and ambulatory devices. Operating for over a decade, Brace
Shop distributes their products worldwide to a variety of industries including healthcare professionals, hospitals and clinics,
government institutions, school sport teams and to the general public. Brace Shop primarily distributes these products to the
general public through its website www.braceshop.com.
In connection with
the Reverse Merger, Scott Silverman resigned as Chairman of our Board of Directors, Shawn Wooden resigned as a member of the Board
of Directors and we elected Mrs. Lynne Shapiro as a member of the Board of Directors.
Our principal executive
offices are located in the United States at 6560 W Rogers Circle, Suite 19, Boca Raton, Florida 33487, and our telephone number
is 954-574-9720. We maintain an Internet website at www.veriteqcorp.com and www.braceshop.com. The information contained in, or
accessible from, our websites is not a part of this Current Report.
Products
We
represent over 50 manufacturers as a re-seller, with established long-term relationships. Items are either warehoused in Brace
Shop’s main location in Boca Raton, Florida, or drop shipped directly from the manufacturer. The Company has chosen to utilize
their suppliers due to their competitive service offerings.
The
primary products we offer are orthopedic braces and supports for the various extremity categories such as knee, ankle, back, wrist,
shoulder, elbow, foot and neck; physical therapy and rehabilitation equipment such as hot and cold therapy, electric stimulation,
medical tables and ambulatory devices.
The
majority of products offered by Brace Shop do not require a prescription. However, certain medical products are available with
a prescription or sold directly to physicians’ offices, hospitals, or other health care professionals.
Our
Competitive Strengths
Management’s
grasp of current and future trends in the orthopedic industry has allowed Brace Shop to maintain a presence in this very competitive
market. Understanding the internet marketplace and innovative marketing technology has enabled Brace Shop to expand into new territories
and outpace certain competitors.
Government
sequestration, Medicare competitive bidding and other rapidly changing health care laws affecting the durable medical equipment
industry have considerably reduced insurance reimbursement and coverage. These changes have strengthened our ability to provide
orthopedic products at very competitive pricing and availability.
Our
management team has a strong medical background, highlighted by extensive experience with thousands of products from multiple
vendors, medical conditions and product application.
Brace
Shop has online visibility with Google, Bing, Amazon, E-bay, Sears and a list of numerous partners around the world.
Our
Strategy
Brace
Shop is viewed as an online leader by manufacturers and durable medical equipment (“DME”) companies. Brace Shop has
high visibility and marketing, longevity in the marketplace, and strong customer loyalty. Management understands the company’s
customer base and product usage, and engages in proactive and profitable marketing strategies.
Brace
Shop obtains new customers through the following platforms:
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Pay-Per-Click
(PPC) and Search Engine Optimization campaigns
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Google,
Bing search visibility
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Product
listings on Amazon, eBay, and Sears
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Due
to the retail nature of the business, lengthy product lifespan, and individual requirements, management estimates that approximately
10% of our sales come from repeat customers. Strategies for customer retention include high levels of customer interaction/follow-up,
extensive marketing software, email marketing campaigns, and an active social media interaction.
Our
focus on improving our technology to enhance the customer experience online has continued to provide a positive return and allowed
us to continue to grow with this ever-changing market. Understanding our customers and properly serving them products and information
allows us to provide a positive purchasing experience for our customers.
Opportunities
Government
Contracts/VA Medical Centers/
General Services Administration Veteran Affairs
The
government’s online portals and procurement of healthcare products have evolved over the years. Brace Shop’s online
visibility and General Services Administration (“GSA”) Veteran Affairs contract, Data Universal Numbering System and
Commercial and Government Entity Code provide a sense of trust and security for government online and offline purchases. This
market is expanding rapidly and provides a tremendous opportunity for expansive growth.
Increased
on-line consumer awareness/brand identity
In
2014, Brace Shop had over 1.9 million unique visitors, with over 10 million page views. As internet technology continues to expand
into everyday life, consumers are more educated and demanding. Like most people, trust, experience, brand identity and years of
service are features that consumers look for when deciding where to purchase their products. When competitive pricing is similar,
consumers tend to work with a company that demonstrates these online properties. Brace Shop is at the forefront of the online
orthopedic market and has demonstrated these properties over several years, making it a unique business with tremendous consumer
acceptance.
Expansion
into Mobile Responsive Arena
Online
shoppers are quickly shifting their Internet searches to mobile devices. We are aware of this rapid change in consumer behavior
and are meeting the challenge head on by redesigning Brace Shop’s website to be completely mobile responsive. This expansion
into a mobile receptive website allows the Company to take advantage of the new mobile ad networks that are being developed by
Facebook, Twitter, Google, Apple and PayPal and should expand Brace Shop business.
Strategic
Partnerships with Major Manufacturers
Brace
Shop has been in business for over a decade. During that time, the Company has established firm and cooperative partnerships with
several major vendors. Brace Shop’s vendors understand the changes in the healthcare field as it relates to the normal sales
channels they are accustomed to. As the internet continues to grow and their normal sales channels are reduced, they have looked
at Brace Shop as a more prominent player in internet orthopedic sales.
Expansion
into International Markets
For
the past year and over the next year, Brace Shop has been, and is expected to, continue to supplement its international online
presence with a new physical location in Kuala Lumpur, Malaysia. Brace Shop International’s vision is to create a positive
impact on quality of life by providing an efficient, affordable way for customers in Asia to purchase orthopedic bracing and supports
that have been shown to be effective in treating common musculoskeletal disorders. By leveraging cooperative relationships with
companies such as the Spine & Joint Centers, Brace Shop is poised for substantial expansion in Malaysia, Indonesia and China.
Expansion
into Private Label Branding
Brace
Shop's private label is also a potential source for new revenue. As a private label, consumer price comparisons and price matching
are eliminated. It also allows for greater product margins with no online competition.
Marketing
to the Changes Caused by Healthcare Reform
With
the current healthcare market rapidly changing under the Affordable Care Act, durable medical equipment and orthopedic extremity
product reimbursement are changing. Consumers now look outside of the doctor’s office and local medical supply for the best
product and the best price. As Brace Shop expands its online medical selection, its potential growth in the healthcare arena is
unlimited.
Complementing
on-line sales with traditional retail sales channels
Brick
and mortar retail stores are being affected by expanding online sales channels. According to Internet Retailer, it is estimated
that online retail sales will grow 57% by 2018 and account for 11% of total retail sales. Opportunities exist to integrate Brace
Shop into traditional retail channels, and allow more visibility and selection for the consumer than is currently available.
Government
Regulation
We
have no specific governmental regulations that we need to comply with as a reseller. Due to our GSA Veteran Affairs contract,
we do have to submit quarterly government sales information into the GSA’s Quarterly Reporting System while annually updating
SAM (System for Award Management), VETS-4212 (Federal Contract Reporting), and SBA (Small Business Association) records.
Employees
As
of the date of this filing, Brace Shop has 15 full-time employees. VeriTeQ Corporation has no full-time employees.
Competition
Competitors
include:
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betterbraces.com
owned by DJO Global
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Sellers
listed on Amazon and eBay
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Brace
Shop differentiates itself from the competition by offering the largest selection in its niche market, providing expanded product
information, extending educated customer service and support, while providing competitive pricing.
Seasonality
Brace
Shop experiences stronger profits during the months of August through February. This is primarily due to the start of football,
ski and the back-to-school season. Sales of orthopedic braces used by youth athletes in sports such as volleyball, football and
basketball increase during those months. During the winter ski season, the need for knee braces increase as do back braces due
to shoveling injuries. Marketing costs stay steady throughout the year.
Properties
Our principal executive
offices are located in the United States at 6560 West Rogers Circle, Suite 19, Boca Raton, Florida 33487, an approximately 12,000
square foot property. The property is owned by Braceshop Real Estate Holdings, LLC, a Florida limited liability company (“Braceshop
Real Estate Holdings”), an affiliate of Brace Shop, subject to two mortgage loans with two different financial institutions.
Legal
Proceedings
From
time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business.
We are not currently a party to in any legal proceeding that we believe would have a material adverse effect on our business,
financial condition or operating results.
RISK
FACTORS
AN
INVESTMENT IN OUR SECURITIES IS HIGHLY SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK. WE FACE A VARIETY OF RISKS THAT MAY AFFECT
OUR OPERATIONS OR FINANCIAL RESULTS AND MANY OF THOSE RISKS ARE DRIVEN BY FACTORS THAT WE CANNOT CONTROL OR PREDICT. BEFORE INVESTING
IN THE SECURITIES YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS, TOGETHER WITH THE FINANCIAL AND OTHER INFORMATION CONTAINED
IN THIS REPORT. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCURS, OUR BUSINESS, PROSPECTS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COULD BE MATERIALLY ADVERSELY AFFECTED. IN THAT CASE, THE TRADING PRICE OF OUR COMMON STOCK WOULD LIKELY DECLINE AND YOU MAY LOSE
ALL OR A PART OF YOUR INVESTMENT. ONLY THOSE INVESTORS WHO CAN BEAR THE RISK OF LOSS OF THEIR ENTIRE INVESTMENT SHOULD CONSIDER
AN INVESTMENT IN OUR SECURITIES.
THIS
REPORT CONTAINS CERTAIN STATEMENTS RELATING TO FUTURE EVENTS OR THE FUTURE FINANCIAL PERFORMANCE OF OUR COMPANY. PROSPECTIVE INVESTORS
ARE CAUTIONED THAT SUCH STATEMENTS ARE ONLY PREDICTIONS AND INVOLVE RISKS AND UNCERTAINTIES, AND THAT ACTUAL EVENTS OR RESULTS
MAY DIFFER MATERIALLY. IN EVALUATING SUCH STATEMENTS, PROSPECTIVE INVESTORS SHOULD SPECIFICALLY CONSIDER THE VARIOUS FACTORS IDENTIFIED
IN THIS REPORT, INCLUDING THE MATTERS SET FORTH BELOW, WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED
BY SUCH FORWARD-LOOKING STATEMENTS.
If
any of the following or other risks materialize, the Company’s business, financial condition, and results of operations
could be materially adversely affected which, in turn, could adversely impact the value of our Common Stock. In such a case, investors
in our Common Stock could lose all or part of their investment.
Prospective
investors should consider carefully whether an investment in the Company is suitable for them in light of the information contained
in this Report and the financial resources available to them. The risks described below do not purport to be all the risks to
which the Company or the Company could be exposed. This section is a summary of certain risks and is not set out in any particular
order of priority. They are the risks that we presently believe are material to the operations of the Company. Additional risks
of which we are not presently aware or which we presently deem immaterial may also impair the Company’s business, financial
condition or results of operations.
RISKS
ASSOCIATED WITH OUR BUSINESS AND INDUSTRY
We
lack an established operating history on which to evaluate its business and determine if it will be able to execute our business
plan, and can give no assurance that operations will result in profits.
We have only been
engaged in our current and proposed business operations since May 6, 2016. As a result, we have no operating history upon which
you may evaluate our proposed business and prospects. Our proposed business operations are subject to numerous risks, uncertainties,
expenses and difficulties associated with early stage enterprises. You should consider an investment in our company in light of
these risks, uncertainties, expenses and difficulties. Such risks include:
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the absence of an operating history at our current scale;
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our reliance on manufacturers;
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expected continual losses for the foreseeable future;
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our ability to anticipate and adapt to a developing
market(s);
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acceptance by consumers;
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limited marketing experience;
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a competitive environment characterized by well-established
and well-capitalized competitors;
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the ability to identify, attract and retain qualified
personnel;
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our ability to provide superior customer service; and
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reliance on key personnel.
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Because
we are subject to these risks, you may have a difficult time evaluating our business and your investment in our company. We may
be unable to successfully overcome these risks which could harm our business.
Our
business strategy may be unsuccessful and we may be unable to address the risks we face in a cost-effective manner, if at all.
If we are unable to successfully address these risks our business will be harmed.
We
have incurred losses in prior periods and expect to incur losses in the future. We may never be profitable.
There can be no assurance
that we will be able to implement its business plan, generate sustainable revenue or ever achieve profitable operations. We expect
to have operating losses until such time as we develop a substantial and stable revenue base. We cannot assure you that it can
achieve or sustain profitability on a quarterly or annual basis in the future.
Our
dependence on our manufacturers could increase our costs and impair our ability to receive inventory in a timely manner, which
can adversely affect our profits and cash flow.
Brace
Shop operates as a reseller with approximately 50 manufacturer partners. Brace Shop has agreements with these companies to sell
their products which can generally be terminated at any time, with or without cause. If a manufacturer were to cancel its agreement,
Brace Shop would have to cease selling that vendor’s products online, which could adversely affect sales.
A
sudden increase in product cost and sale prices could affect our margins for many products and decrease sales.
Changes
to our website and popular search engines may have a significant impact on our sales.
Brace
Shop is an online retailer. Modifications to our website may have unintended negative impacts on customer traffic and subsequent
sales.
In
addition, we rely heavily on our website’s visibility on Google and other search engines. Every year, multiple times a year,
Google creates new algorithm updates to better enhance their search capabilities. Our website’ search visibility may be
impacted by modification to Google and other online search engines, such as Yahoo or Bing. A decrease in our website’s search
visibility would negatively impact customer traffic and sales.
If
we are unable to attract and retain personnel, or experience changes in outsourcing companies, it will be difficult to maintain
business or successfully assist our customers and generate repeat sales.
Brace
Shop relies heavily on maintaining properly trained staff to fulfill orders and provide professional guidance for customers. Due
to the variety of products sold, it may take up to three months to fully train a customer service representative before they can
adequately answer consumer questions over the phone. Customer service is a critical facet of generating repeat customer sales.
Brace
Shop also engages third party service providers to work directly with their marketing department. Brace Shop outsources their
Search Engine Optimization, Pay-Per-Click Marketing and website development. The loss of any of these third party service providers
could have an adverse effect on the business.
Failure
to hold General Services Administration Veteran Affairs government contract.
Brace
Shop holds a GSA Veteran Affairs government contract. The loss of this contract or any other government contract or institutional
supply contract could have a material effect on our sales. Brace Shop would lose significant revenue if it failed to maintain
the proper reporting or management in respect of the GSA contract.
Our
business is subject to the risks of earthquakes, fire, power outages, floods and other catastrophic events, and to interruption
by man-made problems such as strikes and terrorism.
A
significant natural disaster, such as an earthquake, hurricane, severe thunderstorm, fire, power outage, flood or other catastrophic
event, or interruptions by strikes, terrorism or other made-made problems, could have a material adverse effect on our business,
operating results and financial condition. Our operational headquarters are located in Florida. Despite any precautions we may
take, the occurrence of a natural disaster or other unanticipated problems at our warehouse could result in lengthy interruptions
in distribution of the products we sell. All of the aforementioned risks may be further increased if our disaster recovery plans
prove to be inadequate.
Although
Brace Shop website servers are hosted out-of-state in a professional hosting environment, if those servers were to go out of service
for any reason, the Company would lose sales as a result of customers’ inability to access our website.
We
may be sued by third parties for alleged infringement of their proprietary rights, which could harm our business.
A
number of other entities and individuals may own or claim to own intellectual property relating to our industry. From time to
time, third parties may claim that we are infringing on their intellectual property rights, and we may be found to be infringing
on such rights. In the future, others may claim that our applications and underlying technology infringe or violate their intellectual
property rights. We may, however, be unaware of the intellectual property rights that others may claim they hold with respect
to some or all of the products we offer. Any claims or litigation could cause us to incur significant expenses and, if successfully
asserted against us, could require that we pay substantial damages or ongoing royalty payments, prevent us from offering our products
or require that we comply with other unfavorable terms. We may also be obligated to indemnify parties or pay substantial settlement
costs, including royalty payments, in connection with any such claim or litigation and to obtain licenses, modify applications
or refund fees, which could be costly. Even if we were to prevail in such a dispute, any litigation regarding our intellectual
property could be costly and time-consuming and divert the attention of our management and key personnel from our business operations.
GENERAL
OPERATING RISK
We
have insufficient funds to develop our business, which may adversely affect our future growth.
We
will need to raise substantial additional capital to fund our operations and to develop and launch our products and services.
We may need to sell equity securities or borrow funds in order to develop these growth strategies and our inability to raise the
additional capital and/or borrow the funds needed to implement these plans may adversely affect our business and future growth.
Our
future capital requirements may be substantial and will depend on many factors including:
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our ability to maintain important government contracts;
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marketing and developing expenses;
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revenue received from sales and operations, if any,
in the future;
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the expenses needed to attract and retain skilled personnel;
and
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the costs associated with being a public company.
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Raising
capital in the future could cause dilution to our existing shareholders, and may restrict our operations or require us to relinquish
rights.
In
the future, we may seek additional capital through a combination of private and public equity offerings, debt financings and collaborations
and strategic and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible
debt securities, your ownership interest will be diluted, and the terms may include liquidation or other preferences that adversely
affect your rights as a shareholder. Debt financing, if available, would result in increased fixed payment obligations and may
involve agreements that include covenants limiting or restricting our ability to take specific actions such as incurring debt,
making capital expenditures or declaring dividends. If we raise additional funds through collaboration, strategic alliance and
licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams
or product candidates, or grant licenses on terms that are not favorable to us.
We
may infringe upon the intellectual property rights of others, which may prevent or delay our product distribution efforts and
negatively impact our operations.
Our
commercial success depends significantly on our ability to operate without infringing the patents and other intellectual property
rights of third parties. For example, there could be issued patents of which we are not aware that the products we sell infringe
upon. There also could be patents that we believe we do not infringe upon, but that we may ultimately be found to infringe upon.
Moreover, patent applications are in some cases maintained in secrecy until patents are issued. The publication of discoveries
in the scientific or patent literature frequently occurs substantially later than the date on which the underlying discoveries
were made and patent applications were filed. Because patents can take many years to issue, there may be currently pending applications
of which we are unaware that may later result in issued patents that our products infringe. For example, pending applications
may exist that provide support or can be amended to provide support for a claim that results in an issued patent that our product
infringes.
We
will incur significant costs as a result of operating as a public company, and our management may be required to devote substantial
time to compliance initiatives.
As
a public company, we incur significant legal, accounting and other expenses, which are approximately $100,000 annually. In addition,
the Sarbanes-Oxley Act, as well as rules subsequently implemented by the SEC, have imposed various requirements on public companies,
including requiring establishment and maintenance of effective disclosure and financial controls as well as mandating certain
corporate governance practices. Our management and other personnel will devote a substantial amount of time and financial resources
to these compliance initiatives.
If
we fail to staff our accounting and finance function adequately, or maintain internal control systems adequate to meet the demands
that are placed upon us as a public company, we may be unable to report our financial results accurately or in a timely manner
and our business and stock price, assuming that a market for our stock develops, may suffer. The costs of being a public company,
as well as diversion of management’s time and attention, may have a material adverse effect on our future business, financial
condition and results of operations.
RISKS
RELATED TO OWNERSHIP OF OUR COMMON STOCK
If
a public market for our common stock develops, it may be volatile. This may affect the ability of our investors to sell their
shares as well as the price at which they sell their shares.
The
market price for shares of our common stock may be significantly affected by factors such as variations in quarterly and yearly
operating results, general trends in the medical wholesaling industry, and changes in state or federal regulations affecting us
and our industry. Furthermore, in recent years the stock market has experienced extreme price and volume fluctuations that are
unrelated or disproportionate to the operating performance of the affected companies. Such broad market fluctuations may adversely
affect the market price of our common stock, if a market for it develops.
As
an “emerging growth company” under the JOBS Act, we are permitted to rely on exemptions from certain disclosure requirements.
We
qualify as an “emerging growth company” under the JOBS Act. As a result, we are permitted to and may rely on exemptions
from certain disclosure requirements. For so long as we are an emerging growth company, we will not be required to:
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have an auditor report on our internal controls over
financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act;
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comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (i.e., an auditor discussion and analysis);
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submit certain executive compensation matters to shareholder advisory votes, such as “say-on-pay”,
“say-on-frequency” and “say-on-golden parachute;” and
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disclose certain executive compensation related items such as the correlation between executive compensation
and performance and comparisons of the Chief Executive’s compensation to median employee compensation.
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In addition, Section
107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided
in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging
growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.
We are not choosing to “opt out” of this provision. Section 107 of the JOBS Act provides that our decision to opt out
of the extended transition period for complying with new or revised accounting standards is irrevocable.
We will remain an
“emerging growth company” until the last day of our fiscal year following the fifth anniversary of the date of our
first sale of common equity securities pursuant to an effective registration under the Securities Act, or until the earliest of
(i) the last day of the first fiscal year in which our total annual gross revenues exceed $1 billion, (ii) the date that we become
a “large accelerated filer” as defined in Rule 12b-2 under the Securities Exchange Act of 1934, which would occur if
the market value of our ordinary shares that is held by non-affiliates exceeds $700 million as of the last business day of our
most recently completed second fiscal quarter or (iii) the date on which we have issued more than $1 billion in non-convertible
debt during the preceding three year period.
Until such time,
however, we cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If
some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock
and our stock price may be more volatile.
Trading on the OTC Pink may be volatile and
sporadic, which could depress the market price of our common stock and make it difficult for our stockholders to resell their shares.
Our Common Stock is quoted on
the OTC Pink. Trading in stock quoted on the OTC Pink is often thin and characterized by wide fluctuations in trading prices due
to many factors that may have little to do with our operations or business prospects. This volatility could depress the market
price of our Common Stock for reasons unrelated to operating performance. Moreover, the OTC Pink is not a stock exchange, and trading
of securities on the OTC Pink is often more sporadic than the trading of securities listed on a quotation system like NASDAQ or
a stock exchange. Accordingly, stockholders may have difficulty reselling any of their shares.
Our Common Stock is a penny stock. Trading of
our Common Stock may be restricted by the SEC’s penny stock regulations and the Financial Industry Regulatory Authority’s
sales practice requirements, which may limit a stockholder’s ability to buy and sell our stock.
Our Common Stock is a penny stock.
The SEC has adopted Rule 15g-9, which generally defines a “penny stock” to be any equity security that has a market
price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions.
Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who
sell to persons other than established customers and “accredited investors”. The term “accredited investor”
refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or
annual income exceeding $200,000 or $300,000 jointly with their spouse.
The penny stock rules require
a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure
document in a form prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny
stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation
of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny
stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information,
must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing
before or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction in a penny
stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is
a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure
requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject
to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities.
We believe that the penny stock rules discourage investor interest in, and limit the marketability of, our Common Stock.
In addition to the “penny
stock” rules promulgated by the SEC, the Financial Industry Regulatory Authority (“FINRA”) has adopted rules
that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that
the investment is suitable for that customer. Prior to recommending speculative low-priced securities to their non-institutional
customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status,
investment objectives and other information. Under interpretations of these rules, FINRA believes there is a high probability that
speculative low-priced securities will not be suitable for at least some customers. FINRA’s requirements make it more difficult
for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock.
Substantial sales of our
Common Stock could adversely affect our stock price.
We have 723,651
shares of common stock outstanding as of the date of this Current Report. Sales of a substantial number of shares of Common Stock,
or the perception that such sales could occur, could adversely affect the market price of our Common Stock by introducing a large
number of sellers to the market. Such sales could cause the market price of our Common Stock to decline. We cannot predict whether
future sales of our Common Stock, or the availability of our Common Stock for sale, will adversely affect the market price for
our Common Stock or our ability to raise capital by offering equity securities.
We do not expect to pay
dividends on our Common Stock, and investors will be able to receive cash in respect of the shares of Common Stock only upon the
sale of the shares.
We have no intention
in the foreseeable future to pay any cash dividends on our Common Stock. Therefore, an investor in our Common Stock will obtain
an economic benefit from the Common Stock only after an increase in its trading price and only by selling the Common Stock.
We have the right to issue shares
of preferred stock. If we were to issue preferred stock, it is likely to have rights, preferences and privileges that may adversely
affect the common stock.
We are authorized
to issue 5,000,000 shares of preferred stock, with such rights, preferences and privileges as may be determined from time-to-time
by our board of directors. Our board of directors is empowered, without stockholder approval, to issue preferred stock in one or
more series, and to fix for any series the dividend rights, dissolution or liquidation preferences, redemption prices, conversion
rights, voting rights, and other rights, preferences and privileges for the preferred stock. The issuance of shares of preferred
stock, depending on the rights, preferences and privileges attributable to the preferred stock, could adversely reduce the voting
rights and powers of the common stock and the portion of the Company’s assets allocated for distribution to common stockholders
in a liquidation event, and could also result in dilution in the book value per share of the common stock being offered. The preferred
stock could also be utilized, under certain circumstances, as a method for raising additional capital or discouraging, delaying
or preventing a change in control of the Company, to the detriment of the investors in the common stock being offered. We cannot
assure you that the Company will not, under certain circumstances, issue shares of its preferred stock.
We
currently have 1,841 shares of our Series D Convertible Preferred Stock (the “Series D Preferred Stock”) outstanding
with an aggregate liquidation preference of $1,841,000. The Series D Preferred Stock are convertible into shares of our Common
Stock at the option of the holder at a conversion price that is equal to the average closing price of our Common Stock over any
5 consecutive Trading Days occurring between March 12, 2015 and the conversion date, with the five-day period being elected by
the holder of the Series D Preferred Stock in the conversion notice.
We
currently have 888 shares of our Series E Preferred Stock outstanding. Following the eighteen month anniversary of the date of
issuance, the holders of the Series E Preferred Stock shall be entitled to receive dividends at the rate of 5% per annum, payable
quarterly. Upon the occurrence of any liquidation, dissolution or winding up of VeriTeQ, each holder of Series E Preferred Stock
then outstanding shall be entitled to receive, out of the assets of the Company available for distribution to its stockholders,
an amount per share of Series E Preferred Stock equal to the amount that would be receivable if the Series E Preferred Stock had
been converted into Common Stock immediately prior to such liquidation distribution, plus, in each case, accrued and unpaid dividends.
Each share of Series E Preferred Stock shall be convertible into such number of shares of the Company’s Common Stock equal
to 0.1% of the Company at the time of conversion, on a fully-diluted basis.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The
following management’s discussion and analysis should be read in conjunction with the historical financial statements and
the related notes thereto contained in this Current Report. The management’s discussion and analysis contains forward-looking
statements, such as statements of our plans, objectives, expectations and intentions. Any statements that are not statements of
historical fact are forward-looking statements. When used, the words “believe,” “plan,” “intend,”
“anticipate,” “target,” “estimate,” “expect” and the like, and/or future tense
or conditional constructions (“will,” “may,” “could,” “should,” etc.), or similar
expressions, identify certain of these forward-looking statements. These forward-looking statements are subject to risks and uncertainties,
including those under “Risk Factors” in this Current Report, that could cause actual results or events to differ materially
from those expressed or implied by the forward-looking statements. Our actual results and the timing of events could differ materially
from those anticipated in these forward-looking statements as a result of several factors. We do not undertake any obligation
to update forward-looking statements to reflect events or circumstances occurring after the date of this report.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We
were originally incorporated under the laws of the State of Missouri on May 11, 1993 under the name Digital Angel Corporation,
and effective April 20, 2007, we reincorporated in the state of Delaware. On October 18, 2013 we changed our name from Digital
Angel Corporation to VeriTeQ Corporation. In November 2015 substantially all of our assets were sold at auction by the holders
of the Company’s senior secured convertible promissory note. Between November 4, 2015 and the Closing Date, we have not
engaged in any operations and our business has been dormant. As such, we have been a “shell” company, as defined in
Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
Reverse
Merger
On May 6, 2016,
we consummated the transaction evidenced by the Stock Purchase Agreement. Pursuant to the terms of the Stock Purchase Agreement,
Brace Shop became a wholly-owned subsidiary of ours. In the Reverse Merger, we purchased all of the outstanding membership interests
of Brace Shop from Mrs. Lynne Shapiro, and in exchange, we paid (i) $250,000 in cash, $125,000 of which was paid to the Mrs. Lynne
Shapiro upon the execution of the Stock Purchase Agreement and the remaining $125,000 payable, subject to certain conditions, within
four business days after the closing of the Reverse Merger, (ii) 849 shares of
Series E Preferred Stock
, which is convertible
into 84.9% of the issued and outstanding shares of Common Stock on a fully diluted basis, and has voting rights on an as converted
basis and (iii) the Goldenshare, exercisable at $0.00001 per share with a cashless exercise provision for that number of shares
of Common Stock required to insure that the Series E Preferred Stock issued as part of the purchase price to the Mrs. Lynne Shapiro
is convertible into 84.9% of the issued and outstanding shares of Common Stock, on a fully diluted basis. At the closing of the
Reverse Merger, VeriTeQ Corporation’s former Chief Executive Officer will receive 39 shares of the Series E Preferred Stock
convertible into 3.9% of the issued and outstanding Common Stock on a fully-diluted basis. The shares of Series E Preferred Stock
and the Goldenshare shall not be convertible until the six (6) month anniversary of the Closing of the Reverse Merger. Further,
once a majority of the outstanding Series E Preferred Stock has been converted into Common Stock, then any other Series E Preferred
Stock then outstanding shall automatically be deemed converted into Common Stock on the fifth business day following the date that
a majority of the outstanding Series E Preferred Stock is converted into Common Stock.
Brace Shop operates
as an expanding online retailer of orthopedic braces and supports for the various extremity categories such as knee, ankle, back,
wrist, shoulder, elbow, foot and neck; physical therapy and rehabilitation equipment such as hot and cold therapy, electric simulation,
medical tables and ambulatory devices. Operating for over 15 years, Brace Shop distributes their products worldwide to a variety
of industries including healthcare professionals, hospitals and clinics, government institutions, school sport teams and to the
general public. Braceshop Real Estate Holdings, was formed as a Florida limited liability company on April 12, 2012 and is an
affiliate of Brace Shop. Brace Shop and Braceshop Real Estate Holdings are under common control and Brace Shop Real Estate Holdings
is considered a variable interest entity for the purpose of the consolidated financial statements.
At the closing of
the Reverse Merger, Scott Silverman resigned as Chairman of our Board of Directors, Shawn Wooden resigned as a member of the Board
of Directors and we elected Mrs. Lynne Shapiro as a member of the Board of Directors.
As
a result of the Reverse Merger and the change in business and operations of our company from a public “shell” company
to a company engaged in the business of providing orthopedic braces, a discussion of the past financial results of our company
is not pertinent, and under generally accepted accounting principles in the United States the historical financial results of
Brace Shop, the accounting acquirer, prior to the Reverse Merger are considered the historical financial results of our company.
The Reverse Merger was accounted for as a recapitalization effected by a Reverse Merger, wherein Brace Shop is considered the
acquirer for accounting and financial reporting purposes.
The
following discussion highlights the results of operations of Brace Shop and its affiliate Braceshop Real Estate Holdings and the
principal factors that have affected its financial condition as well as its liquidity and capital resources for the periods described,
and provides information that management believes is relevant for an assessment and understanding of the financial condition and
results of operations presented herein. The following discussion and analysis is based on the audited and unaudited consolidated
financial statements contained in this Current Report, which have been prepared in accordance with generally accepted accounting
principles in the United States. You should read the discussion and analysis together with such financial statements and the related
notes thereto.
Basis
of Presentation
The
audited consolidated financial statements for the fiscal years ended December 31, 2015 and 2014 include a summary of our significant
accounting policies and should be read in conjunction with the discussion below. In the opinion of management, all material adjustments
necessary to present fairly the consolidated results of operations for such periods have been included in these audited consolidated
financial statements. All such adjustments are of a normal recurring nature.
Results
of Operations
Year
Ended December 31, 2015 compared to the year-ended December 31, 2014
The
following table sets forth our revenues, expenses and net loss for the years ended December 31, 2015 and 2014. The financial information
below is derived from our audited consolidated financial statements included as an exhibit to this Current Report.
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For the Year
Ended
December 31, 2015
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For the Year
Ended
December 31, 2014
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Revenue
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Retail Sales
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$
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7,010,176
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$
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6,661,116
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Total Revenue
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$
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7,010,176
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$
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6,661,116
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Cost of Retail Sales
|
|
$
|
(4,468,207
|
)
|
|
$
|
(4,028,168
|
)
|
Gross Profit
|
|
$
|
2,541,969
|
|
|
$
|
2,632,948
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
General and Administrative
|
|
$
|
(341,403
|
)
|
|
$
|
(346,088
|
)
|
Marketing and Promotion
|
|
$
|
(1,342,043
|
)
|
|
$
|
(1,413,871
|
)
|
Payroll Expenses
|
|
$
|
(900,720
|
)
|
|
$
|
(766,558
|
)
|
Credit Card Processing
|
|
$
|
(288,063
|
)
|
|
$
|
(258,117
|
)
|
Impairment Loss
|
|
$
|
(150,000
|
)
|
|
|
-
|
|
Total Operating Expenses
|
|
$
|
(3,022,229
|
)
|
|
$
|
(2,784,634
|
)
|
|
|
|
|
|
|
|
|
|
Loss from Operations
|
|
$
|
(480,260
|
)
|
|
$
|
(151,686
|
)
|
Other Income and Expense:
|
|
|
|
|
|
|
|
|
Other Expense
|
|
$
|
(146,623
|
)
|
|
|
-
|
|
Sublease Income
|
|
$
|
12,965
|
|
|
$
|
4,500
|
|
Interest Expense
|
|
$
|
(93,779
|
)
|
|
$
|
(48,037
|
)
|
|
|
|
|
|
|
|
|
|
Total Other Income and Expense
|
|
$
|
(227,437
|
)
|
|
$
|
(43,537
|
)
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(707,697
|
)
|
|
$
|
(195,223
|
)
|
Revenues
The
Company’s revenues were $7,010,176 and $6,661,116 for the years ending December 31, 2015 and 2014, respectively. This increase
was primarily due to an increase in online sales.
Cost
of Revenue
Our
cost of revenue increased by $440,039, or 10.92%, during the year ended December 31, 2015, to $4,468,207, from $4,028,168 in cost
of goods sold for the year ended December 31, 2014. The increase in cost of goods sold was due primarily to an increase in product
costs and shipping rates.
Operating
Expenses
Total
operating expenses were $3,022,229 and $2,784,634 for the years ending December 31, 2015 and 2014, respectively. This increase
is primarily due to the Company incurring expenses for software development in 2015. Due to cash flow constraints the Company
was unable to implement the use of the software and as a result recorded an impairment loss of $150,000. The Company also had
an increase in online sales which prompted us to hire additional employees resulting in higher payroll expenses. Furthermore,
the increase in online sales resulted in increased credit card processing fees.
Loss
from Operations
We
reported a loss from operations of $480,260 for the year ended December 31, 2015, as compared to a loss from operations of $151,686
for the year ended December 31, 2014, which represents an increase of $328,574, or 217%, for the year ended December 31, 2015.
Other
Income (Expenses)
Total
other expenses, net of other income, were $227,437 for the year ended December 31, 2015, compared to $43,537 for the year ended
December 31, 2014. Other expense was $146,623 for the year ended December 31, 2015, as compared to total other expense of $0 for
the year ended December 31, 2014, which is primarily attributable to effectuating the Reverse Merger. Pursuant to the Stock Purchase
Agreement, a portion of the purchase price payable by VeriTeQ was financed by the sale of a senior secured convertible promissory
note in the principal amount of $147,058 by VeriTeQ Corporation to a third party and then advanced to Mrs. Lynne Shapiro. Brace
Shop signed a Security Agreement securing the VeriTeQ promissory note with certain Brace Shop, LLC assets. The Security Agreement
created an indirect guarantee of the debt of a third party under FASB Accounting Standards Codification (“ASC”) 460.
Per ASC 460 the indirect guarantee of the promissory note was recorded on the consolidated financial statements of Brace Shop
at its estimated fair value of $147,058. Interest expense increased approximately by $45,000 or 95% due to the Company increasing
its line of credit and notes payable in 2015 resulting in higher interest expense. Sublease income was $12,965 for the year ended
December 31, 2015, compared to $4,500 for the year ended December 31, 2015.
Net
Loss
Net
loss for the year ended December 31, 2015 was $707,697 compared to a net loss of $195,223 for same period in 2014. The increase
was mainly attributable to an indirect guarantee expense, an impairment loss recognized related to software implementation and
increased payroll expenses.
Liquidity
and Capital Resources
Liquidity
is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise
operate on an ongoing basis. At December 31, 2015, we had a cash balance of $69,169. Our working capital deficit was $2,191,547
at December 31, 2015.
We
reported a net increase in cash for the year ended December 31, 2015 of $63,608. While we currently have no material commitments
for capital expenditures, at December 31, 2015 we owed approximately $784,000 under mortgage notes payable, $349,000 under a line
of credit, $249,322 ($216,251, net of discounts of $33,071) under notes payable and $246,500 under related party loans and a note
payable.
Our
net sales are not sufficient to fund our operating expenses. We will need to raise significant additional capital to fund our
operating expenses, pay our obligations, and grow our company. We reported a net loss of $707,697 during the year ended December
31, 2015. We do not anticipate we will be profitable in 2016. Therefore our operations will be dependent upon our ability to secure
additional financing. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities,
or other financing mechanisms. Even if we are able to raise the funds required, it is possible that we will incur unexpected costs
and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to
seek alternative financing. The inability to obtain additional capital may restrict our ability to grow and may reduce our ability
to continue to conduct business operations. If we are unable to obtain additional financing, we will likely be required to curtail
our marketing and development plans and possibly cease our operations. Furthermore, we have debt obligations which must be satisfied.
If we are successful in securing additional working capital, we intend to increase our marketing efforts to grow our revenues.
We do not presently have any firm commitments for any additional capital and our financial condition as well as the uncertainty
in the capital markets may make our ability to secure this capital difficult. There are no assurances that we will be able to
continue our business, and we may be forced to cease operations in which event investors could lose their entire investment in
our company. Included in our Notes to the financial statements for the year ended December 31, 2015 is a discussion regarding
Going Concern.
Operating
activities
Net
cash flows used in operating activities for the year ended December 31, 2015 amounted to $183,064 and was primarily attributable
to our net loss of $707,697, offset by depreciation of $30,279, impairment expense of $150,000, amortization of debt discount
of $43,929 and changes in operating assets and liabilities of $299,732. Net cash flows provided in operating activities for the
year ended December 31, 2014 amounted to $37,141 and was primarily attributable to our net loss of $195,223, offset by depreciation
of $29,962 and changes in operating assets and liabilities of $201,712.
Investing
activities
Net
cash flows used in investing activities for the year ended December 31, 2015 totaled $150,000, which was due to the purchase of
software. Net cash flows used in investing activities for the year ended December 31, 2014 totaled $3,507, which was due to the
purchase of property and equipment.
Financing
activities
Net
cash flows provided by financing activities was $396,672 for the year ended December 31, 2015. We received proceeds from loans
of $514,250, proceeds from a line of credit of $65,000 and proceeds from related parties of $274,500. We made payments of $55,610
related to a bank overdraft, notes payable payments of $341,928, repayments of related party loans totaling $28,000 and mortgage
note payments of $31,540. Net cash flows used in financing activities was $38,643 for the year ended December 31, 2014. We received
proceeds from a line of credit of $34,000 and proceeds of a bank overdraft of $55,610. We made payments to notes payable of $30,225
and equity distributions of $98,028.
Going
Concern Consideration
Our
operations and financial results are subject to numerous various risks and uncertainties that could adversely affect our business,
financial condition and results of operations. We have incurred losses since our inception resulting in a member’s deficit
of $2,040,221 as of December 31, 2015, and further losses are anticipated in the development of our business, raising substantial
doubt about our ability to continue as a going concern. The ability to continue as a going concern is dependent upon our generating
profitable operations in the future and/or obtaining the necessary financing to meet our obligations and repay our liabilities
arising from normal business operations when they become due. Our future financial results are also uncertain due to a number
of factors, some of which are outside our control. These risk factors include, but are not limited to, our ability to raise additional
funding and the results of our proposed operations.
Contractual
Obligations
We
have certain fixed contractual obligations and commitments that include future estimated payments. Changes in our business needs,
cancellation provisions, changing interest rates, and other factors may result in actual payments differing from the estimates.
We cannot provide certainty regarding the timing and amounts of payments. We have presented below a summary of the most significant
assumptions used in our determination of amounts presented in the tables, in order to assist in the review of this information
within the context of our consolidated financial position, results of operations, and cash flows.
The
following table summarizes our contractual obligations as of December 31, 2015, and the effect these obligations are expected
to have on our liquidity and cash flows in future periods.
|
|
Payments Due by Period
|
|
|
|
Total
|
|
|
Less than 1 year
|
|
|
1-3 Years
|
|
|
4-5 Years
|
|
|
5 Years +
|
|
Contractual Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Line of credit
|
|
$
|
349,000
|
|
|
|
349,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Notes payable
|
|
$
|
249,322
|
|
|
|
249,322
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Related party loans payable
|
|
$
|
121,500
|
|
|
|
121,500
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Related party note payable
|
|
$
|
125,000
|
|
|
|
125,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Mortgage payable
|
|
$
|
788,844
|
|
|
|
32,654
|
|
|
|
105,782
|
|
|
|
77,929
|
|
|
|
572,479
|
|
Total Contractual Obligations:
|
|
$
|
1,633,666
|
|
|
|
877,476
|
|
|
|
105,782
|
|
|
|
77,929
|
|
|
|
572,479
|
|
Off
Balance Sheet Arrangements
As
of the date of this Current Report, we had no off-balance sheet arrangements. We are not aware of any material transactions that
are not disclosed in our consolidated financial statements.
Significant
Accounting Policies and Critical Accounting Estimates
The
methods, estimates, and judgments that we use in applying our accounting policies have a significant impact on the results that
we report in our consolidated financial statements. Some of our accounting policies require us to make difficult and subjective
judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain. Our most critical
accounting estimates include:
Use
of Estimates —
The preparation of financial statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent
assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimated.
Accounts
Receivable -
The Company extends thirty-day credit terms to certain customers based on credit worthiness of medical supply
companies, hospitals, military, government institutions and schools. Management reviews any accounts receivable balances over
thirty days. Account balances that are deemed to be uncollectible are charged to the bad debt expense after all means of collection
have been exhausted and the potential for recovery is considered remote. The accounts receivable balance is comprised mostly of
internet sales due to merchant account timing differences.
Inventories
-
Inventories, consisting of finished goods, are stated at the lower of cost and net realizable value utilizing the first-in,
first-out method.
Property
and Equipment
— Property and equipment and building and building improvements are carried at cost. The cost of repairs
and maintenance is expensed as incurred. When assets are retired or disposed of, the cost and accumulated depreciation are removed
from the accounts, and any resulting gains or losses are included in income in the year of disposition. The Company examines the
possibility of decreases in the value of fixed assets when events or changes in circumstances reflect the fact that their recorded
value may not be recoverable. Depreciation is calculated on a straight-line basis over the estimated useful life of the assets.
Building improvements are amortized on a straight-line basis over the building depreciable period.
Internal
Use Software -
Costs incurred to develop internal-use software during the preliminary project stage are expensed as incurred.
Internal-use software development costs are capitalized during the application development stage, which is after: (i) the preliminary
project stage is completed; and (ii) management authorizes and commits to funding the project and it is probable the project will
be completed and used to perform the function intended. Capitalization ceases at the point the software project is substantially
complete and ready for its intended use, and after all substantial testing is completed. Upgrades and enhancements are capitalized
if it is probable that those expenditures will result in additional functionality. Amortization is provided for on a straight-line
basis over the expected useful life of five years of the internal-use software development costs and related upgrades and enhancements.
When existing software is replaced with new software, the unamortized costs of the old software are expensed when the new software
is ready for its intended use.
Impairment
of Long-Lived Assets -
Long-Lived Assets of the Company are reviewed for impairment whenever events or circumstances indicate
that the carrying amount of assets may not be recoverable, pursuant to guidance established in ASC 360-10-35-15,
“Impairment
or Disposal of Long-Lived Assets”
. The Company recognizes an impairment loss when the sum of expected undiscounted future
cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s
estimated fair value and its book value.
Revenue
Recognition and Sales
— The Company follows the guidance of the FASB ASC 605-10-S99 “Revenue Recognition Overall
– SEC Materials”. The Company records revenue when persuasive evidence of an arrangement exists, product delivery
has occurred, the sales price to the customer is fixed or determinable, and collectability is reasonably assured. The Company
derives revenue from online orders from customers and direct sales via purchase orders to a variety of industries and enterprises
including healthcare professionals, hospitals and clinics, government institutions, and school sports teams. The Company recognizes
revenue upon shipment of its products.
Recently
Enacted Accounting Standards
For
a description of accounting changes and recent accounting standards, including the expected dates of adoption and estimated effects,
if any, on our consolidated financial statements, see “Note 1: Recent Accounting Pronouncements” in the financial
statements filed with this Current Report.
Quantitative
and Qualitative Disclosures About Market Risk
We
are not required to provide quantitative and qualitative disclosures about market risk because we are a smaller reporting company.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Beneficial ownership
is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. In accordance with Securities and Exchange Commission rules, shares of our voting securities
which may be acquired upon exercise of stock options or warrants which are currently exercisable or which become exercisable within
60 days of the date of the applicable table below are deemed beneficially owned by the holders of such options and warrants and
are deemed outstanding for the purpose of computing the percentage of ownership of such person, but are not treated as outstanding
for the purpose of computing the percentage of ownership of any other person. Subject to community property laws, where applicable,
the persons or entities named in the tables below have sole voting and investment power with respect to all shares of our voting
securities indicated as beneficially owned by them.
The following table
sets forth information with respect to the beneficial ownership of our voting securities as of May 6, 2016, after the Reverse
Merger, by (i) each stockholder known by us to be the beneficial owner of more than 5% of our voting securities, (ii) each of
our directors and executive officers, and (iii) all of our directors and executive officers as a group. To the best of our knowledge,
except as otherwise indicated, each of the persons named in the table has sole voting and investment power with respect to the
shares of our voting securities beneficially owned by such person, except to the extent such power may be shared with a spouse.
To our knowledge, none of the shares listed below are held under a voting trust or similar agreement, except as noted. Other than
the Reverse Merger, to our knowledge, there is no arrangement, including any pledge, by any person of securities of the Company
or any of its parents, the operation of which may at a subsequent date result in a change of control of the Company.
Unless
otherwise indicated in the following table, the address for each person named in the table is c/o Brace Shop, 6560 W Rogers Cir
#19, Boca Raton, FL 33487.
Name
and Address of Beneficial Owner
|
|
|
Series
D Preferred Stock
|
|
Series
E Preferred Stock
|
|
Common
Stock
|
|
|
|
|
Shares
Beneficially Owned (1)
|
|
%
of Class
|
|
|
Shares
Beneficially Owned (1)
|
|
%
of Class
|
|
Shares
Beneficially Owned (2)
|
|
% of Class
|
|
Lynne
Shapiro
|
|
|
*
|
|
*
|
|
|
849
|
|
95.61
|
%
|
*
|
|
*
|
|
Kenneth
Shapiro
|
|
|
*
|
|
*
|
|
|
*
|
|
*
|
|
*
|
|
*
|
|
Michael
James
|
|
|
*
|
|
*
|
|
|
*
|
|
*
|
|
*
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
directors and executive officers as a group (3 persons)
|
|
|
*
|
|
*
|
|
|
849
|
|
95.61
|
%
|
*
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5%
Shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Magna
Equities I, LLC
|
|
|
1,400
|
|
76.05
%
|
|
|
*
|
|
*
|
|
*
|
|
*
|
|
Iliad Research & Trading, L.P
|
|
|
*
|
|
*
|
|
|
*
|
|
*
|
|
79,514
|
|
9.99
|
%
|
Ned Siegel
|
|
|
*
|
|
*
|
|
|
*
|
|
*
|
|
61,366
|
|
8.48
|
%
|
Vis Vires Group, Inc.
|
|
|
*
|
|
*
|
|
|
*
|
|
*
|
|
79,514
|
|
9.99
|
%
|
PositiveID Corporation
|
|
|
*
|
|
*
|
|
|
*
|
|
*
|
|
79,514
|
|
9.99
|
%
|
Union Capital, LLC
|
|
|
*
|
|
*
|
|
|
*
|
|
*
|
|
79,514
|
|
9.99
|
%
|
KBM Worldwide, Inc.
|
|
|
*
|
|
*
|
|
|
*
|
|
*
|
|
79,514
|
|
9.99
|
%
|
(1)
|
Applicable percentage ownership is based on 1,841 shares of Series D Preferred Stock, and 888 shares of Series
E Preferred Stock outstanding as of the date of this Current Report.
|
|
|
(2)
|
The list of 5% beneficial shareholders of Common Stock is derived from filings of Schedule 13G with respect
to the Company’s Common Stock since January 1, 2015, which we have assumed represent all current 5% beneficial shareholders.
For each 5% beneficial shareholder of Common Stock that has disclosed that its beneficial interest is predicated upon the exercise
of such beneficial shareholder’s rights under a convertible promissory note to convert its interest into 9.99% of the Company’s
issued and outstanding Common Stock, we have disclosed the number of shares that each such 5% beneficial shareholder would own
if it were to convert such interest as of the date of this Current Report. Applicable percentage ownership is based on 723,651
shares of Common Stock issued and outstanding as of the date of this Current Report.
|
DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Directors
and Executive Officers
Below
are the names of and certain information regarding the Company’s current executive officers and directors who were appointed
effective as of the closing of the Reverse Merger:
Name
|
|
Age
|
|
Position
|
|
Date Named to Board
of Directors/as
Executive Officer
|
Kenneth Shapiro (1)
|
|
60
|
|
Chief Executive Officer and Director
|
|
January 6, 2016
|
Lynne Shapiro (2)
|
|
63
|
|
Director
|
|
May
6, 2016
|
Michael James
|
|
57
|
|
Director
|
|
January 6, 2016
|
(1)
|
Kenneth Shapiro had been a Director of Brace Shop since
June 2004.
|
(2)
|
Lynne Shapiro had been a Director of Brace Shop since
June 2004.
|
Directors
are elected to serve until their successors are elected and qualified. Directors are elected by a plurality of the votes cast
at the annual meeting of stockholders and hold office until the expiration of the term for which he or she was elected and until
a successor has been elected and qualified.
A
majority of the authorized number of directors constitutes a quorum of the Board of Directors for the transaction of business.
The directors must be present at the meeting to constitute a quorum. However, any action required or permitted to be taken by
the Board of Directors may be taken without a meeting if all members of the Board of Directors individually or collectively consent
in writing to the action.
Executive
officers are appointed by the Board of Directors and serve at its pleasure.
The
principal occupation and business experience during at least the past five years for our executive officers and directors is as
follows:
Lynne
Shapiro –Director
Lynne
Shapiro is Chief Executive Officer of Brace Shop, LLC. Lynne has brought years of professional experience, in and out of the medical
equipment field to our on-line business. Following a Bachelor’s degree from Fairleigh Dickinson University Lynne held various
positions before coming to Brace Shop, LLC. In the past, Lynne has, worked as a high school history teacher, a Senior Inspector
for the NJ Casino Control Commission, a Paralegal Attorney, an Instructor for US Satellite Broadcasting, an Instructor for Computer
Literacy and Job Preparedness and a Medical Biller. Immediately before joining Brace Shop, Lynne worked for MEDIQ, PRN. MEDIQ
which eventually was acquired by Hill-Rom was a company which was one of the largest DME rental companies in the nation. It was
here that Lynne learned the most about medical equipment and understood it to be a thriving industry. At MEDIQ, Lynne worked her
way up to Vice President of Human Resources.
Lynne
primarily works closely with Brace Shop vendors on pricing and product selection. This has led to a competitive on-line product
assortment with an aggressive consumer friendly pricing structure.
Kenneth
Shapiro –Chief Executive Officer and Director
Dr.
Shapiro, age 60, is Chief Executive Officer and Medical Director of Brace Shop, LLC, which he founded nearly twenty years ago.
Prior to founding Brace Shop, Dr. Shapiro was a licensed podiatrist for more than 20 years. He holds a Bachelor of Science Degree
from the University of Western Ontario in London Ontario Canada, and a D.P.M. Degree from the Temple School of Podiatric Medicine
in Philadelphia. Following a surgical residency at Kensington Hospital in Philadelphia, Dr. Shapiro went into private practice
for over 20 years with offices in Philadelphia, Pennsylvania and Marlton New Jersey. During that time, he achieved board certification
from the American Board of Podiatric Surgery and became a Fellow of the American College of Foot and Ankle Surgeons. Dr. Shapiro
was on staff at numerous hospitals and surgical centers throughout Philadelphia and Southern New Jersey, specializing in Foot
and Ankle Surgery.
Dr.
Shapiro brings a wealth of medical and orthopedic knowledge to the company in assisting and training Brace Shop staff in ensuring
customer satisfaction and medical compliance.
Michael
James –Director
Mr.
James, age 57, has been Chief Financial Officer Terra Tech Corp. since April 2011. Previously, Mr. James served as Chief Executive
Officer of Nestor, Inc. (“Nestor”) where he successfully completed a financial restructuring of Nestor prior to its
sale in September 2009 from the Receiver's Estate in Superior Court of the State of Rhode Island. He also served on Nestor's Board
of Directors from 2006 to 2009. Mr. James has been the Managing Partner of Kuekenhof Capital Management, LLC, a private investment
management company, for the past ten years where he continues to serve as Managing Director of Kuekenhof Equity Fund, L.P. and
Kuekenhof Partners. Mr. James is also a director of Guided Therapeutics, Inc. where he serves as Chairman of the Compensation
Committee and as a member of the Audit Committee. Mr. James holds a Bachelor of Science Degree in Accounting from Fairleigh Dickinson
University.
Director
Independence
We
are not currently subject to the listing requirements of any national securities exchange or inter-dealer quotation system which
has requirements that a majority of the board of directors be “independent” and, as a result, we are not at this time
required to have our Board of Directors comprised of a majority of “independent directors.” None of our five directors
is an independent director under the applicable standards of the SEC and the Nasdaq stock market.
Family
Relationships
The
Chief Executive Officer of the Company and the Director are husband and wife, respectively. The Director of Marketing is the daughter
of the Chief Executive Officer and Director.
Involvement
in Certain Legal Proceedings
None
of our directors or executive officers has been involved in any of the following events during the past ten years:
|
●
|
any
bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either
at the time of the bankruptcy or within two years prior to that time;
|
|
●
|
any
conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other
minor offences);
|
|
●
|
being
subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction,
permanently or temporarily enjoining, barring, suspending or otherwise limiting his or her involvement in any type of business,
securities or banking activities; or
|
|
●
|
being
found by a court of competent jurisdiction (in a civil action), the Commission or the Commodity Futures Trading Commission
to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.
|
Section
16(a) Beneficial Ownership Reporting Compliance
Section
16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers, and persons who own more than 10%
of our outstanding common stock, to file with the SEC initial reports of ownership and reports of changes in ownership of common
stock. Officers, directors and greater than 10% stockholders are required by SEC regulations to furnish us with copies of all
Section 16(a) forms they file.
Based
solely upon a review by us of Forms 3 and 4 relating to fiscal years 2015 and 2014 as furnished to us under Rule 16a-3(d) under
the Act, and Forms 5 and amendments thereto furnished to us with respect to fiscal year 2012, we believe that during the fiscal
years ended December 31, 2015 and 2014, there was no failure to comply with Section 16(a) filing requirements applicable to our
officers, directors and 10% stockholders, except that our former director, Mr. Daniel Penni, filed one late Form 4 in 2014.
Code
of Ethics
Our
Board of Directors has approved and we have adopted a Code of Business Conduct and Ethics, or the Code of Conduct, which applies
to all of our directors, officers and employees. Our Board of Directors has also approved and we have adopted a Code of Ethics
for Senior Financial Officers, or the Code for SFO, which applies to our chief executive officer, president, chief legal and financial
officer and other officers. The Code of Conduct and the Code for SFO are available upon written request to VeriTeQ Corporation,
Attention: Secretary, 6560 W Rogers Circle, Suite 19, Boca Raton, Florida 33487. The Audit Committee is responsible for overseeing
the Code of Conduct and the Code for SFO. Our audit committee must approve any waivers of the Code of Conduct for directors and
executive officers and any waivers of the Code for SFO.
Audit
Committee
Our
Board of Directors established an audit committee in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934.
There are currently no members of the audit committee. The members of our Board of Directors perform the functions of the audit
committee. All future members of the audit committee will be independent within the meaning of Rule 4200(a)(15) of the Nasdaq
Stock Market Corporate Governance Standards, as amended. Due to our status as a shell company and our limited resources, we do
not have access to additional eligible candidates. The audit committee is directly responsible for the appointment, compensation
and oversight of our independent auditors. The audit committee oversees the financial reporting process on behalf of our Board
of Directors by reviewing with the independent auditors the scope and results of the audit engagement, monitoring our financial
policies and internal control procedures, and reviewing and monitoring the provisions of non-audit services performed by our independent
auditors. Management is responsible for our internal controls and establishing and reviewing the financial reporting process.
The audit committee acts under a written charter adopted and approved in September 1997.
Nominating
Committee
Our
Nominating Committee considers and nominates candidates for election to our Board of Directors.
Compensation
Committee
Our
Compensation Committee administers the Company’s stock incentive plans, including the review and grant of awards to
officers and other employees under such plans, and recommends the adoption of new plans. The committee also reviews and
approves various other compensation policies and matters and reviews and approves salaries, bonuses and other matters
relating to our officers. The committee reviews all senior corporate employees after the end of each fiscal year to determine
compensation for the subsequent year. Particular attention is paid to each employee’s contributions to our current and
future success, as well as their salary level in comparison to the market value of personnel with similar skills and
responsibilities. The committee also looks at accomplishments which are above and beyond management’s normal
expectations for their positions.
Our Compensation Committee assists our Board of Directors in the discharge of its
responsibilities related to compensation of our executive officers. Specific responsibilities of our Compensation Committee
include:
|
●
|
reviewing
and recommending to our board approval of the compensation, benefits, corporate goals and objectives of our chief executive
officer and our other executive officers;
|
|
●
|
evaluating
the performance of our executive officers; and
|
|
●
|
administering
our employee benefit plans and making recommendations to our Board of Directors regarding these matters.
|
EXECUTIVE
COMPENSATION
Summary
Compensation Table
The
following table sets forth information concerning the total compensation paid or accrued by us and Brace Shop during the last
two fiscal years indicated to (i) all individuals that served as our or Brace Shop’s principal executive officer or acted
in a similar capacity for us or Brace Shop at any time during the most recent fiscal year indicated; (ii) the two most highly
compensated executive officers who were serving as executive officers of us or Brace Shop at the end of the most recent fiscal
year indicated that received annual compensation during such fiscal year in excess of $100,000; and (iii) up to two additional
individuals for whom disclosure would have been provided pursuant to clause (ii) above but for the fact that the individual was
not serving as an executive officer of us or Brace Shop at the end of the most recent fiscal year indicated.
Name
&
Principal
Position
|
|
Fiscal
Year
ended
Dec.
31,
|
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards
(4)
($)
|
|
|
Option
Awards
($)
|
|
|
Non-Equity
Incentive
Plan
Compensation
($)
|
|
|
Non-Qualified
Deferred
Compensation
Earnings
($)
|
|
|
All
Other
Compensation
(1)
($)
|
|
|
Total
($)
|
|
Scott R. Silverman,
|
|
|
2015
|
|
|
|
3,086
|
|
|
|
363,825
|
(3)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
24,181
|
|
|
|
391,092
|
(10)
|
Chief Executive Officer (2)
|
|
|
2014
|
|
|
|
346,500
|
|
|
|
446,500
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
76,057
|
|
|
|
869,057
|
|
Randolph K. Geissler,
|
|
|
2015
|
|
|
|
6,361
|
|
|
|
202,125
|
(5)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
208,486
|
(11)
|
President (4)
|
|
|
2014
|
|
|
|
210,000
|
|
|
|
285,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
31,248
|
|
|
|
526,248
|
|
Marc S. Gelberg, Interim
|
|
|
2015
|
|
|
|
124,038
|
|
|
|
30,000
|
(7)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
154,038
|
(12)
|
Chief Financial Officer (6)
|
|
|
2014
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
&
Principal
Position
|
|
Fiscal
Year
ended
Dec.
31,
|
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards
($)
|
|
|
Option
Awards
($)
|
|
|
Non-Equity
Incentive
Plan
Compensation
($)
|
|
|
Non-Qualified
Deferred
Compensation
Earnings
($)
|
|
|
All
Other
Compensation
($)
|
|
|
Total
($)
|
|
Kenneth Shapiro,
|
|
|
2015
|
|
|
|
143,000
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
143,000
|
|
Medical Director (8)
|
|
|
2014
|
|
|
|
86,500
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
86,500
|
|
Lynne Shapiro,
|
|
|
2015
|
|
|
|
124,800
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
124,800
|
|
CEO (9)
|
|
|
2014
|
|
|
|
68,300
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
68,300
|
|
(1)
|
Amount represents payments made for Mr. Silverman and Mr. Geissler in 2015 and 2014 in connection with their employment agreements, including life and disability insurance and car allowance.
|
(2)
|
On March 16, 2016, Mr. Silverman resigned as our Chief Executive Officer.
|
(3)
|
This amount was accrued pursuant to the minimum bonus payment required under Mr. Silverman’s employment agreement with VeriTeQ Corporation, however, no amount has been paid in respect of such bonus and, effective upon the closing of the Reverse Merger, this entire amount has been forgiven.
|
(4)
|
Mr. Geissler’s employment contract with VeriTeQ Corporation expired in November of 2015 and was not renewed.
|
(5)
|
This amount was accrued pursuant to the minimum bonus requirement under Mr. Geissler’s employment agreement with VeriTeQ Corporation, however, no amount has been paid in respect of such bonus and, effective upon the closing of the Reverse Merger, this entire amount has been forgiven.
|
(6)
|
Mr. Gelberg was appointed Interim Chief Financial Officer of VeriTeQ Corporation on May 21, 2015, and resigned his position on May 6, 2016.
|
(7)
|
This amount was accrued pursuant to the anticipated bonus payment contemplated under Mr. Gelberg’s employment arrangement with VeriTeQ Corporation, however, no amount has been paid or authorized in respect of such bonus.
|
(8)
|
Reflects compensation received from Brace Shop.
|
(9)
|
Reflects compensation received from Brace Shop.
|
(10)
|
See note 3.
|
(11)
|
See note 5.
|
(12)
|
See note 7.
|
We
have no plans in place and have never maintained any plans that provide for the payment of retirement benefits or benefits that
will be paid primarily following retirement including, but not limited to, tax qualified deferred benefit plans, supplemental
executive retirement plans, tax-qualified deferred contribution plans and nonqualified deferred contribution plans.
Except
as indicated below, we have no contracts, agreements, plans or arrangements, whether written or unwritten, that provide for payments
to the named executive officers listed above.
Outstanding
Equity Awards at Fiscal Year-End
On
June 18, 2014, the Company’s stockholders adopted the VeriTeQ Corporation 2014 Stock Incentive Plan (the “2014 Plan”).
The 2014 Plan provided for 50,000,000 shares of common stock to be reserved for awards under the 2014 Plan. On December 18, 2014,
the Company’s shareholders approved an increase in the number of authorized shares of common stock issuable under the 2014
Plan to 500,000,000 shares. On February 24, 2015, in accordance with the terms of the 2014 Plan, our Board of Directors approved
a decrease in the number of shares reserved for issuance under the 2014 Plan from 500,000,000 to 250,000,000.
On August 13, 2015, the
Compensation Committee of VeriTeQ Corporation’s then Board of Directors (the “Compensation Committee”) granted
100,000,000 shares of restricted common stock to executive officers of the Company and options to purchase 123,500,000 shares
of the Company’s common stock to employees and directors of the Company. These grants were under the 2014 Plan. Also on
August 13, 2015, the Compensation Committee granted an additional 150,000,000 shares of restricted common stock to certain executive
officers and a director. The restricted common stock vested on the Closing Date and the stock options vested on the date of grant.
On April 29, 2016, the Compensation Committee and the Board of Directors, with the consent of the grantees, rescinded the grants
of restricted common stock
Brace
Shop has never had any equity compensation plans, and we will discontinue the 2014 Plan going forward. However, we may wish to
issue stock options pursuant to a Stock Option Plan in the future. Such stock options may be awarded to management, employees,
members of the Company’s Board of Directors and consultants of the Company.
Director
Compensation
In
2015 we paid the following to our directors:
Name &
Principal
Position
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards
(1)
($)
|
|
|
Option
Awards
(2)
($)
|
|
|
Non-Equity
Incentive Plan
Compensation
($)
|
|
Non-Qualified
Deferred
Compensation
Earnings
($)
|
|
|
All Other
Compensation
($)
|
|
Total
($)
|
|
Scott R. Silverman (3)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Michael James
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Barry Edelstein
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
540,000
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
540,000
|
|
Shawn Wooden (4)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
540,000
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
540,000
|
|
Daniel E. Penni (5)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
540,000
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
540,000
|
|
Kenneth Shapiro (6)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
Lynne Shapiro (7)
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
0
|
|
(1)
|
Reflects grant date fair value of equity awards computed
in accordance with FASB ASC Topic 718.
|
(2)
|
Reflects grant date fair value of equity awards computed
in accordance with FASB ASC Topic 718.
|
(3)
|
Mr. Silverman resigned from the Company’s Board of Directors on May 6, 2016.
|
(4)
|
Mr. Wooden resigned from the Company’s Board of Directors on May 6, 2016.
|
(5)
|
Mr. Penni resigned from the Company’s Board of
Directors on August 19, 2015.
|
(6)
|
Reflects compensation from Brace Shop.
|
(7)
|
Reflects compensation from Brace Shop.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
SEC
rules require us to disclose any transaction or currently proposed transaction in which the Company is a participant and in which
any related person has or will have a direct or indirect material interest involving the lesser of $120,000 or one percent (1%)
of the average of the Company’s total assets as of the end of last two completed fiscal years. A related person is any executive
officer, director, nominee for director, or holder of 5% or more of the Company’s Common Stock, or an immediate family member
of any of those persons.
None
of our officers, directors, proposed director nominees, beneficial owners of more than 10% of our shares of common stock, or any
relative or spouse of any of the foregoing persons, or any relative of such spouse who has the same house as such person or who
is a director or officer of any parent or subsidiary of our Company, has any direct or indirect material interest in any transaction
to which we are a party since our incorporation or in any proposed transaction to which we are proposed to be a party. In the
event a related party transaction is proposed, such transaction will be presented to our board of directors for consideration
and approval. Any such transaction will require approval by a majority of the disinterested directors and such transactions will
be on terms no less favorable than those available to disinterested third parties.
MARKET
PRICE OF AND DIVIDENDS ON COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock has
been quoted on OTC Pink under the symbol “VTEQ” since October 14, 2014, and was quoted on the OTC Markets prior
to that time. The table below sets forth for the periods indicated the quarterly high and low bid prices as reported by the
Pink Sheets. These quotations reflect inter-dealer prices, without retail mark-up, mark-down, or commission and may not
necessarily represent actual transactions.
|
|
Quarter (1)
|
|
High
|
|
|
Low
|
|
Fiscal year ended December 31, 2014
|
|
First
|
|
$
|
1.48
|
|
|
$
|
0.65
|
|
|
|
Second
|
|
$
|
1.21
|
|
|
$
|
0.11
|
|
|
|
Third
|
|
$
|
0.16
|
|
|
$
|
0.00
|
|
|
|
Fourth
|
|
$
|
0.01
|
|
|
$
|
0.00
|
|
|
|
Quarter (2)
|
|
High
|
|
|
Low
|
|
Fiscal year ended December 31, 2015
|
|
First
|
|
$
|
0.17
|
|
|
$
|
0.00
|
|
|
|
Second
|
|
$
|
0.01
|
|
|
$
|
0.00
|
|
|
|
Third
|
|
$
|
0.55
|
|
|
$
|
0.04
|
|
|
|
Fourth
|
|
$
|
0.35
|
|
|
$
|
0.05
|
|
(1)
|
Our Common Stock traded on the OTC Markets for the First, Second and Third Quarters of the fiscal year ended December 31, 2014.
|
(2)
|
The Company effected a 1:1000 reverse stock split on February 11, 2015 and a 1:10,000 reverse stock split on July
29, 2015.
|
Our
common stock is considered to be penny stock under rules promulgated by the Securities and Exchange Commission. Under these rules,
broker-dealers participating in transactions in these securities must first deliver a risk disclosure document which describes
risks associated with these stocks, broker-dealers’ duties, customers’ rights and remedies, market and other information,
and make suitability determinations approving the customers for these stock transactions based on financial situation, investment
experience and objectives. Broker-dealers must also disclose these restrictions in writing, provide monthly account statements
to customers, and obtain specific written consent of each customer. With these restrictions, the likely effect of designation
as a penny stock is to decrease the willingness of broker- dealers to make a market for the stock, to decrease the liquidity of
the stock and increase the transaction cost of sales and purchases of these stocks compared to other securities.
We
have been a shell company since approximately November 2015. As a result, we are subject to the provisions of Rule 144(i) which
limit reliance on Rule 144 by shareholders owning stock in a shell company. Under current interpretations, unregistered shares
issued after we first became a shell company cannot be resold under Rule 144 until the following conditions are met:
|
●
|
we
cease to be a shell company;
|
|
|
|
|
●
|
we
remained subject to the Exchange Act reporting obligations;
|
|
|
|
|
●
|
we
file all required Exchange Act reports during the preceding 12 months; and
|
|
|
|
|
●
|
at
least one year has elapsed from the time we filed “Form 10 information” reflecting
the fact that we had ceased to be a shell company.
|
We currently have
options to purchase 123,500,000 shares of Common Stock outstanding. Further, in addition to the Goldenshare issued in connection
with the Reverse Merger, the Company has outstanding warrants with full ratchet provisions which, as of December 31, 2015, are
exercisable into an aggregate of 33,895,080 shares. In addition, Sands Consults, LLC owns a warrant exercisable into 2.99% of
our issued and outstanding Common Stock.
Holders
As of the date of this
Report, we have 723,651 shares of Common Stock outstanding held by approximately 150 stockholders of record.
Dividend
Policy
We
have never paid any cash dividends on our capital stock and do not anticipate paying any cash dividends on our Common Stock in
the foreseeable future. We intend to retain future earnings to fund ongoing operations and future capital requirements. Any future
determination to pay cash dividends will be at the discretion of our Board of Directors and will be dependent upon financial condition,
results of operations, capital requirements and such other factors as the Board of Directors deems relevant.
Securities
Authorized for Issuance under Equity Compensation Plans
Brace
Shop has never had any equity compensation plans, and we will discontinue the 2014 Plan going forward. However, we may wish to
issue stock options pursuant to a Stock Option Plan in the future. Such stock options may be awarded to management, employees,
members of the Company’s Board of Directors and consultants of the Company.
DESCRIPTION
OF SECURITIES
We have authorized
capital stock consisting of 100 billion shares of Common Stock, par value $0.00001, and 5 million shares of preferred stock, par
value $0.01 per share. As of the date of this Report, we had 723,651 shares of Common Stock issued and outstanding, and 2,729
shares of preferred stock issued and outstanding.
Common
Stock
The
holders of outstanding shares of Common Stock are entitled to receive dividends out of assets or funds legally available for the
payment of dividends of such times and in such amounts as the board from time to time may determine. Holders of Common Stock are
entitled to one vote for each share held on all matters submitted to a vote of stockholders. There is no cumulative voting of
the election of directors then standing for election. The Common Stock is not entitled to pre-emptive rights and is not subject
to conversion or redemption. Upon liquidation, dissolution or winding up of our company, the assets legally available for distribution
to stockholders are distributable ratably among the holders of the Common Stock after payment of liquidation preferences, if any,
on any outstanding payment of other claims of creditors. Each outstanding share of Common Stock is duly and validly issued, fully
paid and non-assessable.
Preferred
Stock
We
may issue shares of preferred stock from time to time in one or more series, each of which will have such distinctive designation
or title as shall be determined by our Board of Directors and will have such voting powers, full or limited, or no voting powers,
and such preferences and relative, participating, optional or other special rights and such qualifications, limitations or restrictions
thereof, as shall be stated in such resolution or resolutions providing for the issue of such class or series of preferred stock
as may be adopted from time to time by the Board of Directors.
While
we do not currently have any plans for the issuance of additional preferred stock, the issuance of such preferred stock could
adversely affect the rights of the holders of Common Stock and, therefore, reduce the value of the Common Stock. It is not possible
to state the actual effect of the issuance of any shares of preferred stock on the rights of holders of the Common Stock until
the Board of Directors determines the specific rights of the holders of the preferred stock; however, these effects may include:
|
●
|
Restricting
dividends on the Common Stock;
|
|
●
|
Diluting
the voting power of the Common Stock;
|
|
●
|
Impairing
the liquidation rights of the Common Stock; or
|
|
●
|
Delaying
or preventing a change in control of the Company without further action by the stockholders.
|
Other than in connection
with shares of preferred stock (as explained above), we do not believe that any provision of our charter or By-Laws would delay,
defer or prevent a change in control.
Dividend
Policy
The
Company has not declared or paid any cash dividends on its common stock, and does not intend to declare or pay any cash dividend
in the foreseeable future. The payment of dividends, if any, is within the discretion of the Board of Directors and will depend
on the Company’s earnings, if any, its capital requirements and financial condition and such other factors as the Board
of Directors may consider.
Options
We
currently have options outstanding to purchase 123,500,000 shares of Common Stock outstanding.
Warrants
In addition to the Goldenshare
issued in connection with the Reverse Merger, the Company has outstanding warrants with full ratchet provisions which, as of December
31, 2015, are exercisable into an aggregate of 33,895,080 shares. In addition, Sands Consults, LLC owns a warrant exercisable
into 2.99% of our issued and outstanding Common Stock.
Other
Convertible Securities
The Company has
Convertible notes with an outstanding principal balance of approximately $4.7 million, substantially all of which have full ratchet
provisions.
Transfer
Agent
The
transfer agent for our Common Stock is VStock Transfer, and its telephone number is 212-828-8436.
LEGAL
PROCEEDINGS
From
time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business.
However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time
to time that may harm our business.
We
are currently not aware of any pending legal proceedings to which we are a party or of which any of our property is the subject,
nor are we aware of any such proceedings that are contemplated by any governmental authority.
INDEMNIFICATION
OF DIRECTORS AND OFFICERS
The
Delaware General Corporation Law and our Certificate of Incorporation allow us to indemnify our officers and directors from certain
liabilities and our By-Laws state that we shall indemnify every present or former director or officer of ours (each an “Indemnitee”).
Our
By-Laws provide that we shall indemnify an Indemnitee against all costs, charges and expenses, including amounts paid to settle
an action or satisfy a judgment, actually and reasonably incurred by such Indemnitee.
Other
than discussed above, none of our By-Laws or Certificate of Incorporation includes any specific indemnification provisions for
our officers or directors against liability under the Securities Act. Additionally, insofar as indemnification for liabilities
arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company pursuant to the
foregoing provisions, or otherwise, the Company has been advised that, in the opinion of the SEC, such indemnification is against
public policy as expressed in the Securities Act and is, therefore, unenforceable.
ITEM 3.02
|
UNREGISTERED SALES OF EQUITY SECURITIES
|
The
information regarding (1) the issuance of Series E Preferred Stock and the Goldenshare by the Registrant, and (2) the issuance
of all of the issued and outstanding membership interests of Brace Shop to the Registrant, set forth in Item 2.01, “Completion
of Acquisition or Disposition of Assets—The Reverse Merger and Related Transactions” is incorporated herein by reference.
Shares
Issued in Connection with the Reverse Merger
To
effectuate the Reverse Merger we issued to Mrs. Lynne Shapiro 849 shares of Series E Preferred Stock. The 849 shares of Series
E Preferred Stock are convertible into 84.9% of our issued and outstanding capital stock on a fully-diluted basis, and will be
convertible into shares of Common Stock, beginning on the six month anniversary of the date of its issuance. In addition, we issued
to Mrs. Lynne Shapiro the Goldenshare, which is exercisable, until the Expiration Date (as defined in the Goldenshare), for that
number of shares of Common Stock required to insure that the 849 shares of Series E Preferred Stock are convertible into an aggregate
of 84.9% of our then fully-diluted issued and outstanding capital stock. We also issued 39 shares of Series E Preferred Stock,
which are convertible into 3.9% of our issued and outstanding capital stock on a fully-diluted basis, and are convertible into
Common Stock beginning on the six month anniversary of the date of its issuance, to Scott R. Silverman, the former Chairman of
our Board of Directors. These transactions were exempt from registration pursuant to Section 4(a)(2) of the Securities Act as
not involving any public offering. None of the shares were sold through an underwriter and accordingly, there were no discounts
or commissions involved.
Sales
of Unregistered Securities of Brace Shop
On May 6, 2016,
pursuant to the terms of the Stock Purchase Agreement, Mrs. Lynne Shapiro sold all of the issued and outstanding membership interests
of Brace Shop to the Registrant. This transaction was exempt from registration pursuant to Section 4(a)(2) of the Securities Act
as not involving any public offering. None of the membership interests were sold through an underwriter and accordingly, there
were no discounts or commissions involved.
ITEM 5.01
|
CHANGES IN CONTROL OF REGISTRANT
|
The
information regarding change of control of the Company in connection with the Reverse Merger set forth in Item 2.01, “Completion
of Acquisition or Disposition of Assets—The Reverse Merger and Related Transactions” is incorporated herein by reference.
ITEM 5.02
|
DEPARTURE OF DIRECTORS OR PRINCIPAL OFFICERS; ELECTION
OF DIRECTORS; APPOINTMENT OF PRINCIPAL OFFICERS; COMPENSATORY ARRANGEMENTS OF CERTAIN OFFICERS
|
The
information regarding departure and election of directors and departure and appointment of principal officers of the Company in
connection with the Reverse Merger set forth in Item 2.01, “Completion of Acquisition or Disposition of Assets—The
Reverse Merger and Related Transactions” is incorporated herein by reference.
ITEM 5.06
|
CHANGE IN SHELL COMPANY STATUS
|
Management
has determined that, subsequent to the Reverse Merger, our company is no longer a shell company as defined in Rule 12b-2 of the
United States Securities Exchange Act of 1934, as amended. Please refer to Item 2.01 of this Current Report for a detailed description
of the Stock Purchase Agreement and the business of our company following the Reverse Merger.
ITEM 9.01
|
FINANCIAL STATEMENTS AND EXHIBITS
|
(a)
|
Financial
statements of businesses acquired.
|
In
accordance with Item 9.01(a), Brace Shop’s audited financial statements as of, and for the years ended December 31, 2015
and 2014, and the accompanying notes, are included in this Report beginning on Page F-1.
(b)
|
Pro
forma financial information.
|
In
accordance with Item 9.01(c), the following unaudited pro forma financial information with respect to the Reverse Merger with
Brace Shop and Brace Shop reported in Item 2.01 of this Current Report on Form 8-K are included in this Report beginning on page
F-30.
|
●
|
Unaudited
Pro Forma Combined Balance Sheet as of December 31, 2015
|
|
|
|
|
●
|
Unaudited
Pro Forma Combined Statement of Operations for the year ended December 31, 2015
|
|
|
|
|
●
|
Notes
to the Unaudited Pro Forma Combined Financial Statements.
|
In
reviewing the agreements included or incorporated by reference as exhibits to this Current Report on Form 8-K, please remember
that they are included to provide you with information regarding their terms and are not intended to provide any other factual
or disclosure information about the Company or the other parties to the agreements. The agreements may contain representations
and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely
for the benefit of the parties to the applicable agreement and:
|
●
|
should
not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the
parties if those statements prove to be inaccurate;
|
|
●
|
have
been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement,
which disclosures are not necessarily reflected in the agreement;
|
|
●
|
may
apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and
|
|
●
|
were
made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and
are subject to more recent developments.
|
Accordingly,
these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other
time.
We
have filed with the U.S. Securities and Exchange Commission (the “SEC”), located on 100 F Street NE, Washington, D.C.
20549, Current Reports on Form 8-K, Quarterly Reports on form 10-Q, Annual Reports on Form 10-K, and other reports, statements
and information as required under the Securities Exchange Act of 1934, as amended.
The
reports, statements and other information that we have filed with the SEC may be read and copied at the SEC's Public Reference
Room at 100 F Street NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room
by calling the SEC at 1-800-SEC-0330.
The
SEC maintains a web site (http://www.sec.gov.) that contains the registration statements, reports, proxy and information statements
and other information regarding registrants that file electronically with the SEC such as us. You may access our SEC filings electronically
at this SEC website. These SEC filings are also available to the public from commercial document retrieval services.
Exhibit
Number
|
|
Description
|
|
|
|
2.1**
|
|
Stock Purchase Agreement, dated as of November 25, 2015, by and among the Registrant, Brace Shop and Mrs. Lynne Shapiro
|
2.2*
|
|
VeriTeQ Corporation Goldenshare Warrant, dated as of May 6, 2016, issued to Mrs. Lynne Shapiro
|
3.1*
|
|
Certificate of Designation of Series E Convertible Preferred Stock of VeriTeQ Corporation, dated May 4, 2016, filed May 6, 2016
|
*
Filed herewith
**
Previously filed
†
Management contract or compensatory plan or arrangement
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
|
VERITEQ
CORPORATION
|
|
|
|
Dated:
May 11, 2016
|
By:
|
/s/
Kenneth Shapiro
|
|
|
Kenneth
Shapiro
|
|
|
Chief
Executive Officer
|
BRACE
SHOP, LLC
CONSOLIDATED
FINANCIAL STATEMENTS
DECEMBER
31, 2015 AND 2014
BRACE
SHOP, LLC
CONSOLIDATED
FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31,
2015
AND 2014
TABLE
OF CONTENTS
Report
of Independent Registered Public Accounting Firm
To
the Member of:
Brace
Shop, LLC
We
have audited the accompanying consolidated balance sheets of Brace Shop, LLC and its consolidated variable interest entity, Braceshop
Real Estate Holdings, LLC (the “Company”) as of December 31, 2015 and 2014 and the related consolidated statements
of operations, changes in member's deficit, and cash flows for each of the two years in the period ended December 31, 2015. These
consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated
financial position of Brace Shop, LLC and its consolidated variable interest entity, Braceshop Real Estate Holdings, LLC as of
December 31, 2015 and 2014 and the consolidated results of its operations and its cash flows for each of the two years in the
period ended December 31, 2015 in conformity with accounting principles generally accepted in the United States of America.
The
accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed
in Note 2 to the consolidated financial statements, the Company had a net loss and net cash used in operations of $707,697 and
$183,604, respectively for the year ended December 31, 2015. The Company has a working capital deficit and member's deficit of
$2,191,547, and $2,040,221, respectively, at December 31, 2015. These matters raise substantial doubt about the Company’s
ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
/s/
Salberg &
Company, P.A.
SALBERG & COMPANY, P.A.
Boca Raton, Florida
May 10, 2016
2295
NW Corporate Blvd., Suite 240 • Boca Raton, FL 33431-7328
Phone:
(561) 995-8270 • Toll Free: (866) CPA-8500 • Fax: (561) 995-1920
www.salbergco.com
• info@salbergco.com
Member
National Association of Certified Valuation Analysts • Registered with the PCAOB
Member
CPAConnect with Affiliated Offices Worldwide • Member AICPA Center for Audit Quality
BRACE SHOP, LLC
CONSOLIDATED BALANCE SHEETS
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
Cash
|
|
$
|
69,169
|
|
|
$
|
5,561
|
|
Accounts Receivable
|
|
|
20,790
|
|
|
|
49,910
|
|
Inventories
|
|
|
301,883
|
|
|
|
237,412
|
|
Other Current Assets
|
|
|
-
|
|
|
|
3,080
|
|
|
|
|
|
|
|
|
|
|
Total Current Assets
|
|
|
391,842
|
|
|
|
295,963
|
|
|
|
|
|
|
|
|
|
|
Property and Equipment, net
|
|
|
13,468
|
|
|
|
18,722
|
|
Office Building and Building Improvements, net
|
|
|
888,846
|
|
|
|
913,871
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
1,294,156
|
|
|
$
|
1,228,556
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND MEMBER'S DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts Payable
|
|
$
|
1,526,309
|
|
|
$
|
1,329,302
|
|
Accrued Expenses
|
|
|
31,672
|
|
|
|
36,742
|
|
Bank Overdraft
|
|
|
-
|
|
|
|
55,610
|
|
Sales Returns Reserve
|
|
|
33,945
|
|
|
|
40,937
|
|
Mortgage Notes Payable
|
|
|
32,654
|
|
|
|
31,541
|
|
Line of Credit
|
|
|
349,000
|
|
|
|
284,000
|
|
Notes Payable, net of discounts of $33,071
|
|
|
216,251
|
|
|
|
-
|
|
Related Parties Loans Payable
|
|
|
121,500
|
|
|
|
-
|
|
Related Party Note Payable
|
|
|
125,000
|
|
|
|
-
|
|
Guarantee Liability
|
|
|
147,058
|
|
|
|
-
|
|
Total Current Liabilities
|
|
|
2,583,389
|
|
|
|
1,778,132
|
|
|
|
|
|
|
|
|
|
|
Mortgage Notes Payable, net of current portion and discounts
|
|
|
750,988
|
|
|
|
782,948
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
3,334,377
|
|
|
|
2,561,080
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 11)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Member's Deficit
|
|
|
(2,040,221
|
)
|
|
|
(1,332,524
|
)
|
|
|
|
|
|
|
|
|
|
Total Liabilities and Member's Deficit
|
|
$
|
1,294,156
|
|
|
$
|
1,228,556
|
|
See accompanying notes to consolidated financial statements.
BRACE SHOP, LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
For the Years Ended
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
REVENUES:
|
|
|
|
|
|
|
Retail sales
|
|
$
|
7,010,176
|
|
|
$
|
6,661,116
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
|
7,010,176
|
|
|
|
6,661,116
|
|
|
|
|
|
|
|
|
|
|
COST OF RETAIL SALES:
|
|
|
4,468,207
|
|
|
|
4,028,168
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
2,541,969
|
|
|
|
2,632,948
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
341,403
|
|
|
|
346,088
|
|
Marketing and promotion
|
|
|
1,342,043
|
|
|
|
1,413,871
|
|
Payroll expenses
|
|
|
900,720
|
|
|
|
766,558
|
|
Credit card processing
|
|
|
288,063
|
|
|
|
258,117
|
|
Impairment loss
|
|
|
150,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
3,022,229
|
|
|
|
2,784,634
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(480,260
|
)
|
|
|
(151,686
|
)
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSES):
|
|
|
|
|
|
|
|
|
Other Income (Expense)
|
|
|
(146,623
|
)
|
|
|
-
|
|
Sublease Income
|
|
|
12,965
|
|
|
|
4,500
|
|
Interest Expense
|
|
|
(93,779
|
)
|
|
|
(48,037
|
)
|
|
|
|
|
|
|
|
|
|
Total Other Income (Expense)
|
|
|
(227,437
|
)
|
|
|
(43,537
|
)
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(707,697
|
)
|
|
$
|
(195,223
|
)
|
See accompanying notes to consolidated financial statements.
BRACE SHOP, LLC
CONSOLIDATED STATEMENT OF CHANGES IN MEMBER'S DEFICIT
For the Years Ended December 31, 2015 and
2014
Balance at December 31, 2013
|
|
$
|
(1,039,273
|
)
|
|
|
|
|
|
Member Distributions
|
|
|
(98,028
|
)
|
|
|
|
|
|
Net Loss for the year
|
|
|
(195,223
|
)
|
|
|
|
|
|
Balance at December 31, 2014
|
|
|
(1,332,524
|
)
|
|
|
|
|
|
Net Loss for the year
|
|
|
(707,697
|
)
|
|
|
|
|
|
Balance at December 31, 2015
|
|
$
|
(2,040,221
|
)
|
See accompanying notes to consolidated financial
statements.
BRACE SHOP, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
For the Years Ended
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(707,697
|
)
|
|
$
|
(195,223
|
)
|
Adjustments to Reconcile Net
Loss to Net Cash
Provided by (Used in) Operating Activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
30,279
|
|
|
|
29,962
|
|
Impairment Expense
|
|
|
150,000
|
|
|
|
-
|
|
Amortization of Deferred Loan Costs
|
|
|
693
|
|
|
|
690
|
|
Amortization of Debt Discount
|
|
|
43,929
|
|
|
|
-
|
|
Changes in Operating Assets and Liabilities:
|
|
|
|
|
|
|
|
|
Inventory
|
|
|
(64,471
|
)
|
|
|
(72,548
|
)
|
Accounts Receivable
|
|
|
29,120
|
|
|
|
(4,723
|
)
|
Other Current Assets
|
|
|
3,080
|
|
|
|
-
|
|
Accounts Payable
|
|
|
197,007
|
|
|
|
755,222
|
|
Sales Returns Reserve
|
|
|
(6,992
|
)
|
|
|
20,941
|
|
Accrued Expenses
|
|
|
(5,070
|
)
|
|
|
(497,180
|
)
|
Guarantee Liability
|
|
|
147,058
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net Cash
Provided by (Used in) Operating Activities
|
|
|
(183,064
|
)
|
|
|
37,141
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of Property and Equipment
|
|
|
-
|
|
|
|
(3,507
|
)
|
Purchase of Software
|
|
|
(150,000
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net Cash Used in Investing Activities
|
|
|
(150,000
|
)
|
|
|
(3,507
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from Line of Credit
|
|
|
65,000
|
|
|
|
34,000
|
|
Proceeds (Repayment) of Bank Overdraft
|
|
|
(55,610
|
)
|
|
|
55,610
|
|
Proceeds from Loans
|
|
|
514,250
|
|
|
|
-
|
|
Repayment of Notes Payable
|
|
|
(341,928
|
)
|
|
|
(30,225
|
)
|
Proceeds from Related Party Loans
|
|
|
274,500
|
|
|
|
-
|
|
Repayment of Related Party Loan
|
|
|
(28,000
|
)
|
|
|
-
|
|
Repayment of Mortgage Notes
|
|
|
(31,540
|
)
|
|
|
-
|
|
Equity Distributions
|
|
|
-
|
|
|
|
(98,028
|
)
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by (Used in) Financing Activities
|
|
|
396,672
|
|
|
|
(38,643
|
)
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash
|
|
|
63,608
|
|
|
|
(5,009
|
)
|
|
|
|
|
|
|
|
|
|
Cash - Beginning of Year
|
|
|
5,561
|
|
|
|
10,570
|
|
|
|
|
|
|
|
|
|
|
Cash - End of Year
|
|
$
|
69,169
|
|
|
$
|
5,561
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
66,897
|
|
|
$
|
48,037
|
|
Income Taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH
|
|
|
|
|
|
|
|
|
INVESTING AND FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Discount Recorded on Notes Payable
|
|
$
|
77,000
|
|
|
$
|
-
|
|
See accompanying notes to consolidated financial
statements.
BRACE
SHOP, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2015 AND 2014
NOTE
1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Brace
Shop, LLC started operations in June 2004 as a Florida limited liability company and operates as an online retailer of orthopedic
braces, physical therapy and rehabilitation equipment.
Brace Shop, LLC distributes these products
to the general public through its website
http://www.braceshop.com
. They also sell products to a variety of industries and
enterprises including healthcare professionals, hospitals and clinics, government institutions, and school sports teams.
Braceshop Real Estate Holdings, LLC,
was formed as a Florida limited liability company on April 12, 2012 and is an affiliate of Brace Shop, LLC. Brace Shop, LLC and
Braceshop Real Estate Holdings, LLC (collectively, the “Company” or “Brace Shop”) are under common control
and Brace Shop Real Estate Holdings, LLC is considered a variable interest entity (“VIE”) for the purpose of the consolidated
financial statements.
Basis
of Presentation and Principles of Consolidation
The
consolidated financial statements include the accounts of the Company. In the preparation of consolidated financial statements
of the Company, intercompany transactions and balances are eliminated.
The
accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles
in the United States of America (“US GAAP”).
Use
of Estimates
In
preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported
amounts of assets and liabilities as of the date of the consolidated financial statements and revenues and expenses during the
reporting period. Actual results may differ significantly from those estimates. Significant estimates made by management include,
but are not limited to, allowance for doubtful accounts, inventory valuation, useful life of property and equipment, valuation
of long lived assets, sales returns reserves, and fair value of guarantees.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
The Company places its cash with a high credit quality financial institution. The Company’s account at this institution
is insured by the Federal Deposit Insurance Corporation ("FDIC") up to $250,000. To reduce its risk associated with
the failure of such financial institution, the Company evaluates at least annually the rating of the financial institution in
which it holds deposits. As of December 31, 2015 the Company did not have any balances that exceeded the federally insured limits.
Fair
Value of Financial Instruments
The
Company follows FASB ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”), for assets and liabilities
measured at fair value on a recurring basis and non-recurring basis. ASC 820 establishes a common definition for fair value to
be applied to existing generally accepted accounting principles that require the use of fair value measurements, establishes a
framework for measuring fair value and expands disclosure about such fair value measurements.
BRACE
SHOP, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2015 AND 2014
NOTE
1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
ASC
820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. Additionally, ASC 820 requires the use of valuation techniques that maximize
the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:
|
Level 1:
|
Observable
inputs such as quoted market prices in active markets for identical assets or liabilities
|
|
Level 2:
|
Observable
market-based inputs or unobservable inputs that are corroborated by market data
|
|
|
|
|
Level 3:
|
Unobservable
inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions.
|
Cash
and cash equivalents include money market securities that are considered to be highly liquid and easily tradable as of December
31, 2015 and December 31, 2014. These securities are valued using inputs observable in active markets for identical securities
and are therefore classified as Level 1 within our fair value hierarchy.
In
addition, FASB ASC 825-10-25 Fair Value Option expands opportunities to use fair value measurements in financial reporting and
permits entities to choose to measure many financial instruments and certain other items at fair value. The Company did not elect
the fair value options for any of its qualifying financial instruments.
The
carrying amounts reported in the balance sheet for cash, accounts receivable, accounts payable, accrued expenses, notes payable
and due to related parties approximate their estimated fair market value based on the short-term maturity of these instruments.
The carrying amount of the notes and convertible promissory notes approximates the estimated fair value for these financial instruments
as management believes that such notes constitute substantially all of the Company's debt and the interest payable on the notes
approximates the Company's incremental borrowing rate.
In
2015 the Company incurred expenses for software development. Due to cash flow constraints the Company was unable to implement
the use of the software and as a result recorded an impairment loss of $150,000.
The
table below sets forth a summary of changes in the fair value of the Company’s Level 3 financial assets for the year ended
December 31, 2015.
Balance, December 31, 2014
|
|
$
|
-
|
|
Additions
|
|
|
150,000
|
|
Impairment loss
|
|
|
(150,000
|
)
|
Balance, December 31, 2015
|
|
$
|
-
|
|
Accounts
Receivable
The
Company extends thirty-day credit terms to certain customers based on credit worthiness of medical supply companies, hospitals,
military, government institutions and schools. Management reviews any account receivable balances over thirty days. Account balances
that are deemed to be uncollectible are charged to the bad debt expense after all means of collection have been exhausted and
the potential for recovery is considered remote. The accounts receivable balance is comprised mostly of internet sales
due to merchant account timing differences. During the year ended December 31, 2015 and the year ended December 31, 2014, the
Company recognized $0 of expenses related to uncollectible accounts receivable and management has determined that an allowance
was not necessary at December 31, 2015 and 2014.
Inventories
Inventories,
consisting of finished goods are stated at the lower of cost and net realizable value utilizing the first-in, first-out method.
BRACE
SHOP, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2015 AND 2014
NOTE
1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Property
and Equipment and Building and Building Improvements
Property
and equipment and building and building improvements are carried at cost. The cost of repairs and maintenance is expensed as incurred.
When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting
gains or losses are included in income in the year of disposition. The Company examines the possibility of decreases
in the value of fixed assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.
Depreciation is calculated on a straight-line basis over the estimated useful life of the assets. Building improvements are amortized
on a straight-line basis over the building depreciable period.
Internal
Use Software
Costs
incurred to develop internal-use software during the preliminary project stage are expensed as incurred. Internal-use software
development costs are capitalized during the application development stage, which is after: (i) the preliminary project stage
is completed; and (ii) management authorizes and commits to funding the project and it is probable the project will be completed
and used to perform the function intended. Capitalization ceases at the point the software project is substantially complete and
ready for its intended use, and after all substantial testing is completed. Upgrades and enhancements are capitalized if it is
probable that those expenditures will result in additional functionality. Amortization is provided for on a straight-line basis
over the expected useful life of five years of the internal-use software development costs and related upgrades and enhancements.
When existing software is replaced with new software, the unamortized costs of the old software are expensed when the new software
is ready for its intended use.
Impairment
of Long-Lived Assets
Long-Lived
Assets of the Company are reviewed for impairment whenever events or circumstances indicate that the carrying amount of assets
may not be recoverable, pursuant to guidance established in ASC 360-10-35-15,
“Impairment or Disposal of Long-Lived Assets”
.
The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount
of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book
value. During the years ended December 31, 2015 and 2014 the Company recorded $150,000 and $0 respectively in software impairment
charges which is included in operating expenses in the Statement of Operations.
Loan
Costs
In
2012 the Company incurred loan costs associated with mortgage notes payable. The Company has early adopted ASU 2015-3 “Interest
– Imputation of Interest” - Simplifying the Presentation of Debt Issuance Costs. The loan costs are recorded as a
debt discount and amortized to interest expense over the terms of the mortgage notes payable.
Sales
Returns Reserve
The
Company extends a thirty-day return policy period from the date of purchase. Returns have a 15% restocking fee for refunds. The
restocking fee is waived for exchanges. The Company maintains a sales returns reserve liability account based on its estimate
of future returns.
Warranty
The
Company’s manufacturers provide the highest quality products available. If there is a defect in a product related to materials
or workmanship the Company extends the manufacturer’s warranty to its customers. Therefore no warranty liability is recorded.
BRACE
SHOP, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2015 AND 2014
NOTE
1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue
Recognition
The Company follows the guidance of
the FASB ASC 605-10-S99 “Revenue Recognition Overall – SEC Materials. The Company records revenue when persuasive evidence
of an arrangement exists, product delivery has occurred, the sales price to the customer is fixed or determinable, and collectability
is reasonably assured. The Company derives revenue from online orders from customers and direct sales via purchase orders to a
variety of industries and enterprises including healthcare professionals, hospitals and clinics, government institutions, and school
sports teams. The Company recognizes revenue upon shipment of its products.
Cost
of Retail Sales
Cost
of retail sales includes cost of finished good products and shipping in and out costs. There was no depreciation expense that
was allocable to cost of retail sales.
Marketing
and Promotion
Marketing
and promotion is expensed as incurred. Marketing and promotion expenses for the years ended December 31, 2015 and 2014 were $1,342,043
and $1,413,871, respectively.
Shipping
Costs
Shipping
costs are included in cost of retail sales and totaled $742,104 and $612,963 for the years ended December 31, 2015 and 2014, respectively.
Income
Taxes
Brace Shop, LLC and its VIE are single
member Limited Liability Companies and as such are disregarded entities for federal income tax purposes. Accordingly, all income
is reported on the member’s personal income tax return and no provisions for income taxes are reported in the Company’s
consolidated financial statements.
The
tax years ending December 31, 2014, 2013 and 2012 will be subject for examination for a period of three years after the filing
date.
Concentrations
of Major Customer and Major Vendors
Brace Shop, LLC holds a United States
Government General Services Administration Veteran Affairs (“GSA VA”) government contract. Revenues from this contract
are approximately 1.6% and 1.2% of total revenues in 2015 and 2014, respectively. The loss of this contract or any other government
contract or institutional supply contract could have an effect on our sales. If the Brace Shop failed to maintain the proper reporting
or management of the GSA VA contract, this could result in a loss of business.
As
of December 31, 2015 approximately 83% of accounts receivable was due from one merchant bank related to the processing of on-line
orders.
As
of December 31, 2014 approximately 62% of accounts receivable was due from two merchant banks related to the processing of on-line
orders.
As
of December 31, 2015, three vendors accounted for 36% of accounts payable.
As
of December 31, 2014 three vendors accounted for 47% of accounts payable.
BRACE
SHOP, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2015 AND 2014
NOTE
1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The
Company has a concentration of a major vendor. During the year ended December 31, 2015, one vendor accounted for 16.85%
of cost of retail sales.
During
the year ended December 31, 2014, one vendor accounted for 12.26% of cost of retail sales.
The
Company had foreign sales totaling $379,083 or 5% of total revenue of $7,010,176 for the year ended 2015. For the year ended 2014
the Company had foreign sales totaling $463,358 or 7% of total revenue of $6,661,116.
Segment
Reporting
Per
review of ASC Topic 280, “Segment Reporting” it has been determined that the Company operates in one segment. Braceshop
Real Estate Holdings, LLC and Brace Shop, LLC have a VIE relationship, however the revenue stream related to Braceshop Real Estate
Holdings, LLC is eliminated in consolidation.
Related
Parties
Parties
are considered to be related to the Company if the parties that, directly or indirectly, through one or more intermediaries, control,
are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company,
its management, members of the immediate families of principal owners of the Company and its management and other parties with
which the Company may deal if one party controls or can significantly influence the management or operating policies of the other
to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. The Company
discloses all related party transactions. All transactions shall be recorded at fair value of the goods or services exchanged.
Property purchased from a related party is recorded at the cost to the related party and any payment to or on behalf of the related
party in excess of the cost is reflected as a distribution to related party.
Recent
Accounting Pronouncements
The
Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not expect the future adoption
of any such pronouncements to have a significant impact on the results of operations, financial condition or cash flow.
NOTE
2 – GOING CONCERN
The
accompanying consolidated financial statements are prepared assuming the Company will continue as a going concern which contemplates
the realization of assets and satisfaction of liabilities in the normal course of business. At December 31, 2015, the Company
had a member’s deficit of approximately $2 million and a working capital deficiency of $2,191,547. For the year ended December
31, 2015 the net loss totaled $707,697. The net cash used in operating activities for the year ended December 31, 2015 totaled
$183,064. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The ability
of the Company to continue as a going concern is dependent upon increasing sales and obtaining additional capital and financing. While
the Company believes in the viability of its strategy to increase sales volume there can be no assurances to that effect. The
Company's limited financial resources have prevented the Company from aggressively advertising its products to achieve increased
consumer recognition. These consolidated financial statements do not include any adjustments relating to recovery of recorded
assets or classification of liabilities should the Company be unable to continue as a going concern.
NOTE
3 – INVENTORY
Inventory,
consists of finished goods which are stated at the lower of cost and net realizable value utilizing the first-in, first-out method.
As of December 31, 2015 and 2014 the inventory balance was $301,883 and $237,412, respectively.
BRACE
SHOP, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2015 AND 2014
NOTE
4 - PROPERTY AND
EQUIPMENT AND BUILDING AND BUILDING IMPROVEMENTS
Property
and equipment consisted of the following:
|
|
Estimated
life
|
|
December 31,
2015
|
|
|
December 31,
2014
|
|
Furniture and fixtures
|
|
7 years
|
|
$
|
59,028
|
|
|
$
|
59,028
|
|
Office equipment
|
|
7 years
|
|
|
27,441
|
|
|
|
27,441
|
|
Signs
|
|
7 years
|
|
|
13,037
|
|
|
|
13,037
|
|
Trade show booths
|
|
5 years
|
|
|
2,351
|
|
|
|
2,351
|
|
Software
|
|
3 years
|
|
|
2,948
|
|
|
|
2,948
|
|
Less: Accumulated depreciation
|
|
|
|
|
(91,337
|
)
|
|
|
(86,083
|
)
|
|
|
|
|
$
|
13,468
|
|
|
$
|
18,722
|
|
Building
and building improvements, which are assets of the VIE (see Note 12) consisted of the following:
|
|
Estimated
life
|
|
December 31,
2015
|
|
|
December 31,
2014
|
|
Building
|
|
39 years
|
|
$
|
863,906
|
|
|
$
|
863,906
|
|
Building improvements
|
|
39 years
|
|
|
112,047
|
|
|
|
112,047
|
|
Less: Accumulated depreciation
|
|
|
|
|
(87,107
|
)
|
|
|
(62,082
|
)
|
|
|
|
|
$
|
888,846
|
|
|
$
|
913,871
|
|
For
the years ended December 31, 2015 and 2014, depreciation expense amounted to $30,279 and $29,962 respectively.
NOTE
5 – MORTGAGE NOTES PAYABLE
On
June 29, 2012 Braceshop Real Estate Holdings, LLC executed a mortgage note payable to a bank in the amount of $477,500 relating
to an office condominium where the Company’s corporate offices are located. The terms of the note includes the Company remitting
nine monthly consecutive interest payments, beginning July 29, 2012, with interest calculated on the unpaid principal balance
using an interest rate of 5.3% per annum based on a year of 360 days; one hundred nineteen monthly consecutive principal and interest
payments of $3,252 each beginning April 29, 2013, with interest calculated on the unpaid principal balance using an interest rate
of 5.3% per annum based on a year of 360 days and one principal and interest payment of $304,535 due on March 29, 2023. Braceshop
Real Estate Holdings, LLC recorded loan costs on the mortgage note payable as a debt discount. The loan costs are being amortized
over the term of the mortgage notes payable. The effective interest rate resulting from the debt discounts was not materially
changed from the 5.3%. The balance of the mortgage note payable was $432,882, net of debt discount of $5,202 (principal balance
of $438,084) and $447,232, net of debt discount of $5,895 (principal balance of $453,127) as of December 31, 2015 and 2014 respectively.
On
June 29, 2012 Braceshop Real Estate Holdings, LLC executed a mortgage note payable due to the Florida Business Development Corporation
(FBDC) and guaranteed by the U.S. Small Business Administration (SBA) in the amount of $393,000 related to an office condominium
where the Company’s corporate offices are located. This note replaced a bridge note from a bank which was outstanding from
June 2012 to June 2013. The terms of the note includes an interest rate of 2.10738%, first payment due June 1, 2013 with a note
maturity date of May 1, 2033. The balance of the mortgage note payable was $350,760 and $367,257 as of December 31, 2015 and 2014
respectively. The FBDC mortgage is a second mortgage subordinated to the bank mortgage discussed above.
BRACE
SHOP, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2015 AND 2014
NOTE
5 – MORTGAGE NOTES PAYABLE (continued)
Both
of the above mortgage notes are personally guaranteed by the sole member and the sole member’s spouse who is the Company’s
Medical Director and guaranteed by Brace Shop, LLC.
The
following table presents the minimum principal payments as of December 31, 2015 related to the mortgage notes payable:
Year Ending December 31,
|
|
Principal
|
|
2016
|
|
$
|
32,654
|
|
2017
|
|
|
33,953
|
|
2018
|
|
|
35,241
|
|
2019
|
|
|
36,588
|
|
2020
|
|
|
37,929
|
|
Thereafter
|
|
|
612,479
|
|
Total
|
|
$
|
788,844
|
|
NOTE
6 – LINE OF CREDIT
On
September 30, 2013 the Company opened a $350,000 bank line of credit with a maturity date of September 30, 2015 collateralized
by the assets of the Company. The terms of the line of credit state the Company will pay regular monthly payments of accrued interest
beginning October 30, 2013 and all subsequent interest payments are due on the same day each month going forward. The Company
will pay this line of credit in one payment of all outstanding principal plus all accrued unpaid interest on September 30, 2015.
The line of credit has a variable interest rate which is the highest Prime Rate as published in the “Money Rates”
section of the Wall Street Journal plus 1.75 percent (5.25% at December 31, 2015). As of December 31, 2015 the line of credit
is in default. The Company’s management is working with the lender to revise payoff terms. The balance of the line of credit
amounted to $349,000 and $284,000 respectively as of December 31, 2015 and 2014.
NOTE
7 – NOTES PAYABLE
On
March 9, 2015, the Company issued a promissory note to a financial institution with a funding amount of $300,000 and fixed prepaid
interest of $24,000 resulting in a total note balance of $324,000. The note is collateralized by the assets of the company. This
note has a one-year maturity date. In connection with the note payable, the Company recorded a debt discount of $24,000 to be
amortized over the term of the note. The balance of this note payable amounted to $79,316 net of debt discount of $4,471 as of
December 31, 2015. In March 2016 the Company repaid the balance of this note.
On
September 24, 2015, the Company issued a promissory note with a principal balance of $100,000, 2% origination fee and daily payments
equaling $120,000 over a period of 84 days. On December 14, 2015 the Company executed an amendment to the loan to borrow an additional
$150,000 over a period of an additional 105 days. In connection here in, the Company recorded an aggregate debt discount of $53,000
to be amortized over the terms of the note. The balance of this note payable amounted to $136,935 net of debt discount of $28,600
as of December 31, 2015. In March 2016 the Company repaid the balance of this note.
NOTE
8 – RELATED PARTIES LOANS PAYABLE
On
September 29, 2015, the Chief Executive Officer (CEO) of the Company, who is the sole member of the LLCs, advanced a non-interest
bearing loan of $100,000 to the Company for operating activities. During 2015 the Company repaid the CEO $28,000. The balance
of the loan amounted to $72,000 as of December 31, 2015.
On
October 19, 2015, the Medical Director of the Company who is the husband of the sole member advanced a non-interest bearing loan
of $49,500 to the Company for operating activities. The balance of the loan amounted to $49,500 as of December 31, 2015.
BRACE
SHOP, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2015 AND 2014
NOTE
9 - RELATED PARTY NOTE PAYABLE
On
November 27, 2015, the Company issued a $125,000 non-interest bearing promissory note payable to the CEO/sole member of the Company.
The CEO/sole member provided the Company funds for general operating expenses. The note matured on April 1, 2016, however the
note was extended to June 1, 2016.
NOTE
10 – GUARANTEE LIABILITY
Brace Shop, LLC, the CEO of the Company
and VeriTeQ Corporation (“VeriTeQ”), are parties to a Stock Purchase Agreement dated November 25, 2015. The sole member
of Brace Shop, LLC, is to sell all of her membership interests in Brace Shop, LLC to VeriTeQ Corporation. Pursuant to the Stock
Purchase Agreement a portion of the purchase price payable by VeriTeQ was financed by the sale of a senior secured convertible
promissory note in the principal amount of $147,058 by VeriTeQ Corporation to a third party and then advanced to the seller. Brace
Shop, LLC signed a Security Agreement securing the VeriTeQ promissory note with certain Brace Shop, LLC assets. Pursuant to ASC
460 this creates an indirect guarantee of the debt of a third party. Brace Shop, LLC guaranteed this debt in anticipation of closing
on the Stock Purchase Agreement. Per ASC 460 the indirect guarantee of the promissory note was recorded on the consolidated financial
statements of Brace Shop, LLC at its estimated fair value of $147,058.
NOTE
11 – COMMITMENTS AND CONTINGENCIES
The
Company has entered into a lease for its office space as disclosed in Note 12 – Variable Interest Entity.
The
Company is in default on its bank line of credit. The line is secured by the assets of the Company (see Note 6).
Pursuant to a Stock Purchase Agreement
dated as of November 25, 2015 made and entered into by and among VeriTeQ Corporation, Brace Shop, LLC, and Lynne Shapiro (the “Seller”),
VeriTeQ Corporation agreed to acquire (the “Acquisition”), all of the issued and outstanding membership interests of
the Company, from the Seller, the current sole owner of all of the membership interests (the “Purchase Agreement”).
Pursuant to the terms of the Stock Purchase Agreement, the aggregate purchase price for the member interest is (i) $250,000 in
cash, $125,000 of which was paid to the Seller upon the execution of the Purchase Agreement and the remaining $125,000 payable,
subject to certain conditions, within four business days after the closing of the Acquisition, (ii) 849 shares of VeriTeQ Corporation’s
Series E Preferred Stock which is convertible into 84.9% of the issued and outstanding shares of common stock, par value $0.00001,
of VeriTeQ Corporation (the “Common Stock”), on a fully diluted basis, and has voting rights on an as converted basis
and (iii) a goldenshare in the form of a 5-year warrant (the “Goldenshare”), exercisable at $0.00001 per share with
a cashless exercise provision for that number of shares of Common Stock required to insure that the Series E Preferred Stock issued
as part of the purchase price to the Seller is convertible into 84.9% of the issued and outstanding shares of Common Stock, on
a fully diluted basis. At the closing of the Acquisition, VeriTeQ Corporation’s former Chief Executive Officer will receive
39 shares of the Series E Preferred Stock convertible into 3.9% of the issued and outstanding Common Stock on a fully-diluted basis.
The shares of Series E Preferred Stock and the Goldenshare shall not be convertible until the six (6) month anniversary of the
Closing of the Acquisition. Further, once a majority of the outstanding Series E Preferred Stock has been converted into Common
Stock, then any other Series E Preferred Stock then outstanding shall automatically be deemed converted into Common Stock on the
fifth business day following the date that a majority of the outstanding Series E Preferred Stock is converted into Common Stock.
The
above transaction is anticipated to be accounted for as a reverse recapitalization of Brace Shop, LLC (see Note 15).
In November 2015 the Company executed a 6-month consulting
agreement related to the above pending Stock Purchase Agreement. The agreement requires monthly cash payments of $8,000 plus $25,000
worth of common stock quarterly after consummation of a reverse merger for any remaining term or renewal term of the agreement.
NOTE
12 – VARIABLE INTEREST ENTITY
Current
Generally Accepted Accounting Principles (GAAP) requires a reporting entity to consolidate a Variable Interest Entity (VIE) when
that reporting entity is considered to be the primary beneficiary of the VIE. As a result, VIE guidance requires in certain circumstances,
a reporting entity (lessee) to consolidate a lessor entity when both entities are under common control.
On
March 20, 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-07, Consolidation
(Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements, providing private companies
with accounting alternatives for lease arrangements meeting specified criteria. This ASU is the third accounting alternative for
private companies endorsed by the FASB based upon recommendations of the Private Company Council (PCC).
BRACE
SHOP, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2015 AND 2014
NOTE
12 – VARIABLE INTEREST ENTITY (continued)
In
December 2013, the FASB issued ASU 2013-12, Definition of a Public Business Entity – An addition to the Master Glossary,
which defines a public business entity for purposes of GAAP in ASUs issued subsequent to ASU 2013-12 (it does not change existing
definitions of public and nonpublic entities contained within GAAP resulting from standards prior to ASU 2013-12). This definition
is not limited to companies that are registered with the U.S. Securities and Exchange Commission, but includes, among others,
entities whose financial statements are included in filings with the SEC and entities with securities traded in the OTC markets.
As such, an entity considering adoption of the accounting alternatives provided in this Update should first evaluate whether they
are within the scope of the Update.
Per review of ASU 2013-12 C, Brace Shop,
LLC and Braceshop Real Estate Holdings, LLC need to consolidate due to a VIE relationship because (i) Brace Shop, LLC is the primary
beneficiary of Braceshop Real Estate Holdings, LLC because it occupies the office space and (ii) Brace Shop, LLC provides financial
support to Braceshop Real Estate Holdings, LLC by making rental payments for the property and both are under common control. Since
Brace Shop, LLC is filing with the SEC it are not able to use the alternative provided by ASU 2014-07 for private companies.
Brace Shop, LLC and Braceshop Real
Estate Holdings, LLC entered into a lease agreement in July 2012, pursuant to which Brace Shop, LLC rents office space from Braceshop
Real Estate Holdings, LLC. During 2015 and 2014, Brace Shop, LLC recorded $181,423 and $176,998 respectively, of rent expense
for the office, which is eliminated in consolidation.
The assets and liabilities of Braceshop Real Estate
Holdings, LLC are as follows:
|
|
12/31/2015
|
|
|
12/31/2014
|
|
ASSETS:
|
|
|
|
|
|
|
Cash
|
|
$
|
2,727
|
|
|
$
|
5,561
|
|
Office Building and Building Improvement, net
|
|
|
888,846
|
|
|
|
913,871
|
|
Total Assets
|
|
$
|
891,573
|
|
|
$
|
919,432
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts Payable
|
|
$
|
46,742
|
|
|
$
|
62,056
|
|
Mortgage Notes Payable, net of discount
|
|
|
783,642
|
|
|
|
814,489
|
|
Total Liabilities
|
|
$
|
830,384
|
|
|
$
|
876,545
|
|
The building and building improvements
have been presented separately on the accompanying consolidated balance sheets as they are secured by a first and second mortgage
held by Braceshop Real Estate Holdings, LLC creditors. Furthermore, as discussed in Note 5 the primary beneficiary, Brace Shop,
LLC, has guaranteed the mortgage note obligations.
NOTE
13 – RELATED PARTY
The
Company has the following transactions with related parties (see Notes 8 and 9):
On
September 29, 2015, the Chief Executive Officer (CEO), who is the sole member of the LLCs, of the Company advanced a non-interest
bearing loan of $100,000 to the Company for operating activities. During 2015 the Company repaid the CEO $28,000. The balance
of the loan amounted to $72,000 as of December 31, 2015.
On
October 19, 2015, the Medical Director of the Company who is the husband of the sole member advanced a non-interest bearing loan
of $49,500 to the Company for operating activities. The balance of the loan amounted to $49,500 as of December 31, 2015.
BRACE
SHOP, LLC
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2015 AND 2014
NOTE
13 – RELATED PARTY (continued)
On
November 27, 2015, the Company issued a $125,000 non-interest bearing promissory note payable to the CEO/sole member of the Company.
The CEO/sole member provided the Company funds for general operating expenses. The note matured on April 1, 2016, however the
note was extended to June 1, 2016.
NOTE
14 – EMPLOYEE BENEFIT PLAN
The
Company maintains a 401K plan for the benefit of its employees. At the discretion of the Company’s management it may make
contributions to the plan on its employees’ behalf. As of December 31, 2015 and 2014 the Company had accrued 401K liabilities
of $3,045 and $447, respectively. For the years ended December 31, 2015 and 2014 the Company made contributions to the plan of
$12,891 and $13,400, respectively.
NOTE
15 – SUBSEQUENT EVENTS
On each of January 6, 2016 and February
4, 2016 the CEO of the Company advanced $62,500 which was memorialized in a $125,000 non-interest bearing promissory note payable
to the CEO of the Company on February 4, 2016. The maturity date of the note was extended from May, 2016 to July 1, 2016.
Related to the above mentioned promissory
notes, Brace Shop, LLC, the CEO of the Company and VeriTeQ Corporation, are parties to a Stock Purchase Agreement dated November
25, 2015. The sole member of the Brace Shop, LLC, is to sell all of her membership interests in Brace Shop, LLC to VeriTeQ Corporation.
The remaining portion (see Note 10 for initial portion) of the purchase price payable by VeriTeQ was financed by the sale of two
senior secured convertible promissory notes in January and February 2016 in the principal amounts of $73,529 each by VeriTeQ Corporation
to a third party and then advanced to the seller. Brace Shop, LLC signed a Security Agreement securing the VeriTeQ promissory note
with certain Brace Shop, LLC assets. Pursuant to ASC 460 this creates an indirect guarantee of the debt of a third party. Brace
Shop, LLC guaranteed this debt in anticipation of closing on the Stock Purchase Agreement. The CEO of the Company received an advance
on the Stock Purchase Agreement purchase price and in turn executed the promissory note of $125,000 to the Company as discussed
above. Per ASC 460 the indirect guarantee of the promissory note is to be recorded on the financial statements of Brace Shop, LLC
at the estimated fair value of the promissory note of $147,058.
On
February 26, 2016, the Company borrowed funds and issued a 16% convertible promissory note with a principal balance of $240,000.
The note matures on August 26, 2017. The note is convertible into shares of VeriTeQ Corporation at 60% of the lowest trading price
in the prior 10 trading days prior to the date of conversion. The Company will record this as stock settled debt with a $160,000
premium.
In
March 2016, the Company used part of the proceeds of the above mentioned convertible promissory note to repay the remaining $216,251
principal balances of Notes Payable discussed in Note 7.
The Stock Purchase Agreement discussed
in Note 11 was closed on May 6, 2016. The Reverse Merger is being accounted for as a recapitalization of Brace Shop. Brace Shop
is deemed to be the acquirer in the reverse merger. Consequently, the assets and liabilities and the historical operations that
are reflected in the financial statements prior to the Reverse Merger will be those of Brace Shop and are recorded at the historical
cost basis of Brace Shop, and the consolidated financial statements after completion of the Reverse Merger will include the assets
and liabilities of Brace Shop at historical cost, the assets and liabilities of VeriTeQ Corporation at historical cost, the historical
operations of Brace Shop and the operations of VeriTeQ Corporation from the Closing Date of the Reverse Merger.
BRACE SHOP,
LLC
UNAUDITED PRO
FORMA COMBINED FINANCIAL STATEMENTS
FOR THE YEAR
ENDED DECEMBER 31, 2015
INTRODUCTION
TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The following
unaudited pro forma combined financial statements are presented to illustrate the effects of a Stock Purchase Agreement dated November
25, 2015 where in Brace Shop, LLC, the CEO of the Company (Seller) and VeriTeQ Corporation, are parties.
Pursuant to a Stock Purchase Agreement
dated as of November 25, 2015 made and entered into by and among VeriTeQ Corporation , Brace Shop, LLC, a Florida limited liability
company and Lynne Shapiro (the “Seller”), VeriTeQ Corporation agreed to acquire (the “Acquisition”), all
of the issued and outstanding membership interests of the Company, from the Seller, the current sole owner of all of the membership
interests (the “Purchase Agreement”). Pursuant to the terms of the Stock Purchase Agreement, the aggregate purchase
price for the member interest is (i) $250,000 in cash, $125,000 of which was paid to the Seller upon the execution of the Purchase
Agreement and the remaining $125,000 payable, subject to certain conditions, within four business days after the closing of the
Acquisition, (ii) 849 shares of the VeriTeQ Corporation’s Series E Preferred Stock which is convertible into 84.9% of the
issued and outstanding shares of common stock, par value $0.00001, of VeriTeQ Corporation (the “Common Stock”), on
a fully diluted basis, and has voting rights on an as converted basis and (iii) a goldenshare in the form of a 5-year warrant (the
“Goldenshare”), exercisable at $0.00001 per share with a cashless exercise provision for that number of shares of Common
Stock required to insure that the Series E Preferred Stock issued as part of the purchase price to the Seller is convertible into
84.9% of the issued and outstanding shares of Common Stock, on a fully diluted basis. At the closing of the Acquisition, VeriTeQ
Corporation’s former Chief Executive Officer will receive 39 shares of the Series E Preferred Stock convertible into 3.9%
of the issued and outstanding Common Stock on a fully-diluted basis. The units of Series E Preferred Stock and the Goldenshare
shall not be convertible until the date on or after six (6) months from the date of the Closing of the Acquisition. Further, once
a majority of the outstanding Series E Preferred Stock has been converted into Common Stock, then any other Series E Preferred
Stock then outstanding shall automatically be deemed converted into Common Stock on the fifth business day following the date that
a majority of the outstanding Series E Preferred Stock is converted into Common Stock. In addition, upon the closing of the Acquisition,
pursuant to the Purchase Agreement, VeriTeQ Corporation will pay a consultant $50,000 (less $10,000 that was paid upon the execution
of the Purchase Agreement), and issue the consultant a 3 year warrant to purchase, at an exercise price of $0.01 per share, 2.99%
of the issued and outstanding Common Stock, which warrant may be exercisable on a cashless basis.
The above transaction is anticipated
to be accounted for as a reverse recapitalization of Brace Shop, LLC.
Brace Shop, LLC started operations in
June 2004 as a Florida LLC and operates as an online retailer of orthopedic braces, physical therapy and rehabilitation equipment.
The unaudited
pro forma financial statements as of December 31, 2015 and for the year then ended presents Brace Shop, LLC and its consolidated
variable interest entity and VeriTeQ Corporation as one entity with recapitalization of Brace Shop, LLC. The information presented
in the unaudited pro forma is not indicative of future financial results. The unaudited pro forma financial statements should be
read in conjunction with the accompanying notes and assumptions and the historical financial statements of Brace Shop, LLC and
VeriTeQ Corporation.
VERITEQ CORPORATION
PRO FORMA BALANCE SHEET
DECEMBER 31, 2015
(UNAUDITED)
|
|
BRACE SHOP,
LLC
|
|
|
VeriTeQ
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
|
Corp.
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31,
|
|
|
December 31,
|
|
|
Pro
Forma Adjustments
|
|
|
Pro Forma
|
|
|
|
2015
|
|
|
2015
|
|
|
Debit
|
|
|
Credit
|
|
|
Combined
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
69,169
|
|
|
$
|
395
|
|
|
|
|
|
|
|
|
|
|
$
|
69,564
|
|
Accounts
Receivable - net
|
|
|
20,790
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
20,790
|
|
Inventories
|
|
|
301,883
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
301,883
|
|
Other
Current Assets
|
|
|
-
|
|
|
|
22,307
|
|
|
|
|
|
|
|
|
|
|
|
22,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
391,842
|
|
|
|
22,702
|
|
|
|
|
|
|
|
|
|
|
|
414,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and Equipment - Net
|
|
|
902,314
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
902,314
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
1,294,156
|
|
|
$
|
22,702
|
|
|
|
|
|
|
|
|
|
|
$
|
1,316,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND MEMBER'S DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
Payable
|
|
|
1,526,309
|
|
|
|
713,389
|
|
|
|
|
|
|
|
|
|
|
|
2,239,698
|
|
Accrued
Expenses
|
|
|
31,672
|
|
|
|
1,137,761
|
|
|
|
|
|
|
|
|
|
|
|
1,169,433
|
|
Sales
Returns Reserve
|
|
|
33,945
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
33,945
|
|
Mortgage
Notes Payable
|
|
|
32,654
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
32,654
|
|
Line of Credit
|
|
|
349,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
349,000
|
|
Interest
Payable
|
|
|
-
|
|
|
|
370,608
|
|
|
|
|
|
|
|
|
|
|
|
370,608
|
|
Liability
for Conversion Option
|
|
|
-
|
|
|
|
6,246,042
|
|
|
|
|
|
|
|
|
|
|
|
6,246,042
|
|
Related
Parties Loans Payable
|
|
|
121,500
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
121,500
|
|
Related
Party Note Payable
|
|
|
125,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
125,000
|
|
Guarantee
Liability
|
|
|
147,058
|
|
|
|
-
|
(3)
|
|
|
147,058
|
|
|
|
-
|
|
|
|
-
|
|
Note
Payable
|
|
|
216,251
|
|
|
|
490,000
|
|
|
|
|
|
|
|
|
|
|
|
706,251
|
|
Other
Note Payable, Current, Net of Debt Discount
|
|
|
-
|
|
|
|
4,477,863
|
|
|
|
|
|
|
|
|
|
|
|
4,477,863
|
|
Total
Current Liabilities
|
|
|
2,583,389
|
|
|
|
13,435,663
|
|
|
|
|
|
|
|
|
|
|
|
15,871,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage
Notes Payable, net of current portion and discounts
|
|
|
750,988
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
750,988
|
|
Warranty
Liabilities
|
|
|
-
|
|
|
|
1,428,222
|
|
|
|
|
|
|
|
|
|
|
|
1,428,222
|
|
Total
Liabilities
|
|
|
3,334,377
|
|
|
|
14,863,885
|
|
|
|
|
|
|
|
|
|
|
|
18,051,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
D Preferred Stock ($0.01 par value; 1,841 shares outstanding)
|
|
|
-
|
|
|
|
1,841,000
|
|
|
|
|
|
|
|
|
|
|
|
1,841,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
Deficit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock (5,000,000 shares authorized; $0.01 par value)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
E Convertible Preferred Stock; 1,000 shares designated; 888 shares issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
|
|
|
(2)
|
|
|
9
|
|
|
|
9
|
|
Common
Stock ($0.00001 par value; 100 billion shares authorized; 723,651 shares issued and outstanding)
|
|
|
-
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
7
|
|
Additional
Paid in Capital
|
|
|
-
|
|
|
|
20,992,464
|
(1)
|
|
|
37,674,654
|
|
|
|
|
|
|
|
(18,575,362
|
)
|
|
|
|
|
|
|
|
|
(1)
|
|
|
1,893,163
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
|
|
|
9
|
|
|
|
|
|
|
|
-
|
|
Accumulated
Deficit
|
|
|
-
|
|
|
|
(37,674,654
|
)
|
|
|
|
(1)
|
|
|
37,674,654
|
|
|
|
|
|
Total
Stockholders' Deficit
|
|
|
-
|
|
|
|
(16,682,183
|
)
|
|
|
|
|
|
|
|
|
|
|
(18,575,346
|
)
|
Total
Member's Deficit
|
|
|
(2,040,221
|
)
|
|
|
-
|
|
|
|
|
(1)
|
|
|
1,893,163
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3)
|
|
|
147,058
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,714,884
|
|
|
|
39,714,884
|
|
|
|
|
|
Total
Liabilities and Member's Deficit
|
|
$
|
1,294,156
|
|
|
$
|
22,702
|
|
|
|
|
|
|
|
-
|
|
|
$
|
1,316,858
|
|
See Notes to Unaudited Pro Forma Combined
Financial Statements
VERITEQ CORPORATION
PRO FORMA STATEMENT
OF OPERATIONS
FOR THE YEAR
ENDED DECEMBER 31, 2015
(UNAUDITED)
|
|
BRACE SHOP, LLC
|
|
|
|
|
|
|
|
|
|
|
Consolidated
|
|
VeriTeQ Corp.
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
|
Pro Forma Adjustments
|
|
|
|
|
2015
|
|
2015
|
|
Debit
|
|
Credit
|
|
Pro Forma Combined
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
Retail sales
|
|
$
|
7,010,176
|
|
|
$
|
286,720
|
(4)
|
|
|
286,720
|
|
|
|
|
|
|
$
|
7,010,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
|
7,010,176
|
|
|
|
286,720
|
|
|
|
|
|
|
|
|
|
|
|
7,010,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF RETAIL SALES:
|
|
|
4,468,207
|
|
|
|
123,779
|
|
|
|
|
(4)
|
|
|
123,779
|
|
|
|
4,468,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS PROFIT
|
|
|
2,541,969
|
|
|
|
162,941
|
|
|
|
|
|
|
|
|
|
|
|
2,541,969
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
341,403
|
|
|
|
774,224
|
|
|
|
|
(4)
|
|
|
774,224
|
|
|
|
341,403
|
|
Marketing and promotion
|
|
|
1,342,043
|
|
|
|
7,198
|
|
|
|
|
(4)
|
|
|
7,198
|
|
|
|
1,342,043
|
|
Payroll expenses
|
|
|
900,720
|
|
|
|
6,588,095
|
|
|
|
|
(4)
|
|
|
6,588,095
|
|
|
|
900,720
|
|
Development costs
|
|
|
-
|
|
|
|
176,028
|
|
|
|
|
(4)
|
|
|
176,028
|
|
|
|
-
|
|
Rent expense
|
|
|
-
|
|
|
|
62,054
|
|
|
|
|
(4)
|
|
|
62,054
|
|
|
|
-
|
|
Asset impairment charge
|
|
|
-
|
|
|
|
380,282
|
|
|
|
|
(4)
|
|
|
380,282
|
|
|
|
-
|
|
Other operating expenses
|
|
|
-
|
|
|
|
81,060
|
|
|
|
|
(4)
|
|
|
81,060
|
|
|
|
-
|
|
Credit card processing
|
|
|
288,063
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
288,063
|
|
Impairment loss
|
|
|
150,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
3,022,229
|
|
|
|
8,068,941
|
|
|
|
|
|
|
|
|
|
|
|
3,022,229
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(480,260
|
)
|
|
|
(7,906,000
|
)
|
|
|
|
|
|
|
|
|
|
|
(480,260
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER (INCOME) EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (Income) Expense
|
|
|
133,658
|
|
|
|
(158,593
|
)(4)
|
|
|
158,593
|
(3)
|
|
|
147,058
|
|
|
|
(13,400
|
)
|
Change in fair value of convertible debt
|
|
|
-
|
|
|
|
174,000
|
|
|
|
|
|
|
|
|
|
|
|
174,000
|
|
Change in liability for conversion option
|
|
|
-
|
|
|
|
5,097,958
|
|
|
|
|
|
|
|
|
|
|
|
5,097,958
|
|
Change in value of warranty liability
|
|
|
-
|
|
|
|
1,562,955
|
|
|
|
|
|
|
|
|
|
|
|
1,562,955
|
|
Gain on Extinguishment of Debt
|
|
|
-
|
|
|
|
(9,375
|
)
|
|
|
|
|
|
|
|
|
|
|
(9,375
|
)
|
Gain on foreclosure
|
|
|
-
|
|
|
|
(2,561,274
|
)(4)
|
|
|
2,561,274
|
|
|
|
|
|
|
|
-
|
|
Interest Expense
|
|
|
93,779
|
|
|
|
1,928,608
|
|
|
|
|
|
|
|
|
|
|
|
2,022,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Income (Expense)
|
|
|
227,437
|
|
|
|
6,034,280
|
|
|
|
|
|
|
|
|
|
|
|
8,834,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$
|
(707,697
|
)
|
|
$
|
(13,940,280
|
)
|
|
|
|
|
|
|
|
|
|
$
|
(9,314,786
|
)
|
BRACE
SHOP, LLC
NOTES
TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Pursuant to a Stock Purchase Agreement
dated as of November 25, 2015 made and entered into by and among VeriTeQ Corporation , Brace Shop, LLC, a Florida limited liability
company and Lynne Shapiro (the “Seller”), VeriTeQ Corporation agreed to acquire (the “Acquisition”), all
of the issued and outstanding membership interests of the Company, from the Seller, the current sole owner of all of the membership
interests (the “Purchase Agreement”). Pursuant to the terms of the Stock Purchase Agreement, the aggregate purchase
price for the member interest is (i) $250,000 in cash, $125,000 of which was paid to the Seller upon the execution of the Purchase
Agreement and the remaining $125,000 payable, subject to certain conditions, within four business days after the closing of the
Acquisition, (ii) 849 shares of the VeriTeQ Corporation’s Series E Preferred Stock which is convertible into 84.9% of the
issued and outstanding shares of common stock, par value $0.00001, of VeriTeQ Corporation (the “Common Stock”), on
a fully diluted basis, and has voting rights on an as converted basis and (iii) a goldenshare in the form of a warrant (the “Goldenshare”),
exercisable for that number of shares of Common Stock required to insure that the Series E Preferred Stock issued as part of the
purchase price to the Seller is convertible into 84.9% of the issued and outstanding shares of Common Stock, on a fully diluted
basis. At the closing of the Acquisition, VeriTeQ Corporation’s former Chief Executive Officer will receive 39 shares of
the Series E Preferred Stock convertible into 3.9% of the issued and outstanding Common Stock on a fully-diluted basis. The units
of Series E Preferred Stock and the Goldenshare shall not be convertible until the date on or after six (6) months from the date
of the Closing of the Acquisition. Further, once a majority of the outstanding Series E Preferred Stock has been converted into
Common Stock, then any other Series E Preferred Stock then outstanding shall automatically be deemed converted into Common Stock
on the fifth business day following the date that a majority of the outstanding Series E Preferred Stock is converted into Common
Stock. In addition, upon the closing of the Acquisition, pursuant to the Purchase Agreement, VeriTeQ Corporation will pay a consultant
$50,000 (less $10,000 that was paid upon the execution of the Purchase Agreement), and issue the consultant a 3 year warrant to
purchase, at an exercise price of $0.01 per share, 2.99% of the issued and outstanding Common Stock, which warrant may be exercisable
on a cashless basis.
The Stock Purchase
Agreement for the exchange of stock that was closed on May 6, 2016, is deemed to be a reverse merger and recapitalization of Brace
Shop, LLC with Brace Shop, LLC as the acquiring company for financial accounting purposes, in accordance with the Accounting
and Financial Reporting Interpretations and Guidance prepared by the staff of the U.S. Securities and Exchange Commission. The
financial statements of the combined entity will in substance be those of Brace Shop. Brace Shop, LLC is deemed to be a continuation
of the business.
Unaudited
pro forma adjustments reflect the following transactions:
|
|
|
Debit
|
|
|
Credit
|
|
|
|
|
|
|
|
|
|
1)
|
Additional
Paid in Capital
|
|
|
39,567,817
|
|
|
|
|
|
|
Accumulated
Deficit
|
|
|
|
|
|
|
37,674,654
|
|
|
Member's Deficit
|
|
|
|
|
|
|
1,893,163
|
|
To
record the recapitalization of equity.
|
|
|
Debit
|
|
|
Credit
|
|
|
|
|
|
|
|
|
|
2)
|
Additional
Paid in Capital
|
|
|
9
|
|
|
|
|
|
|
Series
E Convertible PS
|
|
|
|
|
|
|
9
|
|
To
record issuance of 849 Series E Preferred Stock (par value $0.01) and the Goldenshare to Lynne Shapiro, Director of VeriTeQ, and
issuance of 39 Series E Preferred Stock to Scott Silverman, former CEO of VeriTeQ
|
|
|
Debit
|
|
Credit
|
|
|
|
|
|
|
3)
|
Guarantee Liability
|
|
|
147,058
|
|
|
|
|
|
|
Other Income
|
|
|
|
|
|
|
147,058
|
|
To reverse
guarantee liability relieved at closing, May 6, 2016.
|
|
|
Debit
|
|
Credit
|
|
|
|
|
|
|
4)
|
Retail sales
|
|
|
286,720
|
|
|
|
|
|
|
Cost of retail sales
|
|
|
|
|
|
|
123,779
|
|
|
General and administrative expenses
|
|
|
|
|
|
|
774,224
|
|
|
Marketing and promotion
|
|
|
|
|
|
|
7,198
|
|
|
Payroll expenses
|
|
|
|
|
|
|
6,588,095
|
|
|
Development costs
|
|
|
|
|
|
|
176,028
|
|
|
Rent expense
|
|
|
|
|
|
|
62,054
|
|
|
Asset impairment charge
|
|
|
|
|
|
|
380,282
|
|
|
Other operating expenses
|
|
|
|
|
|
|
81,060
|
|
|
Other income
|
|
|
158,593
|
|
|
|
|
|
|
Gain of foreclosure
|
|
|
2,561,274
|
|
|
|
|
|
To
remove operating expenses and revenues related to VeriTeQ Corporation. The Stock Purchase Agreement for the exchange of stock
that was closed on May 6, 2016, is deemed to be a reverse merger and recapitalization of Brace Shop, LLC with Brace Shop, LLC
as the acquiring company for financial accounting purposes, in accordance with the Accounting and Financial Reporting Interpretations
and Guidance prepared by the staff of the U.S. Securities and Exchange Commission. The financial statements of the combined entity
will in substance be those of Brace Shop.
F-
21
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