CONDENSED
NOTES TO FINANCIAL STATEMENTS
March
31, 2016
(unaudited)
1.
ORGANIZATION, BASIS OF PRESENTATION AND LIQUIDITY
Overview
As
of December 31, 2015, the Company had ceased its business operations. On May 6, 2016, the Company completed its acquisition of
Brace Shop, LLC (“Brace Shop”) through a stock purchase agreement and reverse acquisition and recapitalization transaction
(see Note 9).
Basis
of Presentation
Interim
Financial Statements
The
accompanying unaudited financial statements and condensed notes thereto should be read in conjunction with the audited consolidated
financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015. These
interim financial statements have been prepared in accordance the instructions to Form 10-Q and Article 8 of Regulation S-X
of the U.S. Securities and Exchange Commission (the “SEC”) and therefore omit or condense certain footnotes and other
information normally included in interim financial statements prepared in accordance with accounting principles generally accepted
in the United States of America (“U.S. GAAP”). In the opinion of the Company’s management, all adjustments (consisting
of normal recurring adjustments) considered necessary for the fair presentation of the condensed interim financial statements
have been made. Results of operations reported for interim periods may not be indicative of the results for the entire year.
All
periods presented through November 4, 2015 reflect consolidation of the Company’s subsidiaries while periods after November
4, 2015 include only Veriteq Corporation.
Going
Concern
The
accompanying financial statements have been prepared assuming the Company will continue as a going concern, which contemplates
the realization of assets and the settlement of liabilities in the normal course of business. The Company has incurred significant
operating losses and negative cash flows from operations since its inception on December 14, 2011 and had a working capital deficit
at March 31, 2016 and December 31, 2015 of $18 million and $14.5 million, respectively. These factors raise substantial doubt
about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments
to the classification of recorded asset amounts or the amounts and classification of liabilities that might result from this uncertainty.
Although
in May 2016 the Company completed a reverse acquisition with an operating company the Company needs to raise additional funds
immediately and continue to raise funds until it begins to generate sufficient cash from operations, and it may not be able to
obtain the necessary financing on acceptable terms, or at all. During the three months ended March 31, 2016 the Company raised
approximately $226,000, net of original issue discount of $40,000, from the sale of convertible promissory notes (see note 3).
2.
SUMMARY OF SELECTED SIGNIFICANT ACCOUNTING POLICIES
Reverse
Stock Split and Change in Par Value of Common Stock
All
share, per share and capital stock amounts as of March 31, 2016 and December 31, 2015, and for the three months ended March 31,
2016 and the year ended December 31, 2015 have been retroactively restated to give effect to the 1-for-10,000 reverse stock split
in July 2015, the 1-for-1,000 reverse stock split in February 2015 and the change in the par value from $0.01 to $0.00001 per
share of the Company’s common stock in December 2014.
VERITEQ
CORPORATION
CONDENSED
NOTES TO FINANCIAL STATEMENTS
March
31, 2016
(unaudited)
Use
of Estimates
The
preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the year. Actual results could be affected by those estimates.
Included in these estimates are assumptions used in determining the lives and valuation of long-lived assets, in valuation models
used in estimating the fair value of certain promissory notes, warrants, embedded conversion options, stock-based compensation
and in determining valuation allowances for deferred tax assets.
Derivative
Financial Instruments
The
Company accounts for notes payable that are convertible into shares of the Company’s common stock and warrants issued
in conjunction with the issuance of such notes in accordance with the guidance contained in the Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 815,
Derivatives and
Hedging
(“ASC 815”) and ASC Topic 480,
Distinguishing Liabilities From Equity
(“ASC 480”).
For warrant instruments and conversion options embedded in promissory notes that are not deemed to be indexed to the
Company’s own stock, the Company classifies such instruments as liabilities at their fair values at the time of
issuance and adjusts the instruments to fair value at each reporting period. These liabilities are subject to re-measurement
at each balance sheet date until extinguished either through conversion or exercise, and any change in fair value is
recognized in the Company’s statements of operations. Upon conversion of debt the fair value of the derivative is
reclassified into equity and the Common Stock is recorded at the book value of the debt. The fair values of these
derivative instruments have been estimated using a Monte Carlo simulation model. Unobservable inputs that, if changed, might
produce a significantly higher or lower fair value measurement of the Company’s derivative liabilities include the
discount rate used to estimate the fair value of the Company’s subordinated debt and the expected volatility used to
estimate the fair value of warrants reflected as derivative liabilities. The discount rate used to estimate the fair value
of the Company’s subordinated debt is based on rates of return achieved by market participants investing in similar
instruments, and reflects the perceived risk of investing of such instruments. Should the credit risk of the Company improve
or worsen, a lower or higher, respectively, discount rate may be appropriate, which could result in a significantly higher or
lower, respectively, measurement of fair value. The expected volatility used to estimate the fair value of warrants reflected
as derivative liabilities is based on the historical volatility of comparable publicly traded common stocks. Should the
expected volatility of the Company increase or decrease, there could be a significantly higher or lower, respectively,
measurement of fair value.
Loss
per Common Share
Basic
loss per share excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number
of common shares outstanding during the period. Diluted loss per share reflects the potential dilution that could occur if securities
or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock
that then shared in the income of the Company.
VERITEQ
CORPORATION
CONDENSED
NOTES TO FINANCIAL STATEMENTS
March
31, 2016
(unaudited)
The
following stock options and warrants and shares issuable upon conversion of convertible notes payable outstanding at March 31,
2016 and December 31, 2015 were not included in the computation of dilutive loss per share because the net effect would have been
anti-dilutive:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Stock options
|
|
|
123,500,000
|
|
|
|
123,500,000
|
|
Warrants
|
|
|
24,210,777
|
|
|
|
33,895,130
|
|
Shares issuable upon conversion of preferred stock
|
|
|
8,074,561
|
|
|
|
46,964,286
|
|
Shares issuable upon conversion of convertible notes payable
|
|
|
65,033,027
|
|
|
|
82,388,120
|
|
|
|
|
220,818,365
|
|
|
|
286,747,536
|
|
Impact
of Recently Issued Accounting Standards
From
time to time, the Financial Accounting Standards Board (“FASB”) or other standards setting bodies will issue new accounting
pronouncements. Updates to the FASB ASC are communicated through issuance of an Accounting Standards Update (“ASU”).
There have been no new relevant pronouncements since those disclosed in the December 31, 2015 Consolidated Financial Statements.
3.
NOTES PAYABLE
Notes
payable consist of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
(in thousands)
|
|
Convertible notes payable with a bifurcated conversion option
|
|
|
3,796
|
|
|
|
3,345
|
|
Related party notes payable
|
|
|
948
|
|
|
|
1,142
|
|
Other notes payable
|
|
|
61
|
|
|
|
61
|
|
Discounts on notes payable
|
|
|
(202
|
)
|
|
|
(70
|
)
|
|
|
|
4,603
|
|
|
|
4,478
|
|
Less current portion
|
|
|
(4,603
|
)
|
|
|
(4,478
|
)
|
Non-current notes payable
|
|
|
-
|
|
|
|
-
|
|
VERITEQ
CORPORATION
CONDENSED
NOTES TO FINANCIAL STATEMENTS
March
31, 2016
(unaudited)
Convertible
Notes
Between
January 1, 2016 and March 11, 2016, the Company issued convertible promissory notes in the aggregate principal amount of $95,493,
for which the Company received $81,169 in proceeds, net of original issue discounts. In addition, the Company issued convertible
promissory notes in connection with the proposed acquisition and other transactions discussed below in the aggregate principal
amount of $147,059, $125,000 of which was paid to the sellers net of original discount of $22,059. The Company received no cash
proceeds with the issuance of these notes. On March 21, 2016 the Company issued an additional promissory note in the principal
amount of $23,529, for which the Company received $20,000 in proceeds, net of original issue discount.
These
notes are due one year after the date of issuance, bear interest at rates of 12% per annum, and are convertible into shares of
common stock at the lesser of (i) $0.015 per share or (ii) 60% of the average of the three lowest trading prices of the Company’s
common stock during the 10 days prior to conversion.
In
February 2016, as amended in April 2016, in a private transaction between a lender of the Company and a former officer, the lender
purchased $194,010 of notes payable due to the officer. The notes payable were previously considered Related Party Notes Payable,
and are now classified as Convertible Notes (see below) as of March 31, 2016.
On
March 17, 2016, the Company issued 241,917 shares of common stock in satisfaction of $8,955 of convertible notes and $1,520 of
accrued interest. The note was converted at the contractual rate of $0.0433. The approximately $46,000 fair value of the related
embedded conversion option derivative liability was reclassified to additional paid-in capital.
Related
Party Notes Payable
In
February 2016, as amended in April 2016, in a private transaction between a lender of the Company and a former officer, the lender
purchased $194,010 of notes payable due to the officer. The notes have been reclassified into convertible notes as of March 31,
2016 (see above).
Other
Notes Payable
At
March 31, 2016, the total of all of the Company’s outstanding promissory notes was convertible into an aggregate of 65,033,027
shares of the Company’s common stock.
Interest
expense was approximately $194,000 and $334,000 for the three months ended March 31, 2016 and 2015, respectively.
Due
to Affiliate
In
February 2016, Brace Shop, who has a common director with the Company, paid $15,000 of general liability insurance on behalf of
the Company.
VERITEQ
CORPORATION
CONDENSED
NOTES TO FINANCIAL STATEMENTS
March
31, 2016
(unaudited)
4.
SUBORDINATED DEBT REPORTED AT FAIR VALUE
In
December 2012, VAC entered into an asset purchase agreement and royalty agreement with SNC Holding Corp. wherein VAC acquired
various technology and trademarks related to its radiation dose measurement technology. Under the terms of the agreements, VAC
issued a non-interest bearing secured subordinated convertible promissory note in the principal amount of $3.3 million (the “SNC
Note”). The SNC Note is convertible into one-third of the beneficial common stock ownership of VC held by Scott Silverman.
Mr. Silverman did not own any shares of common stock as of March 31, 2016. The note was amended in July 2013 to extend the maturity
date to June 2015 and has not been repaid.
The
SNC Note is secured by all of the assets acquired by the Company under the 2012 asset purchase agreement (the “SNC Collateral”)
consisting primarily of intellectual property. Under the terms of the SNC Note, as amended, the holder of the SNC Note may look
solely to the SNC Collateral to satisfy all obligations of the Company to it under the SNC Note and not to any other assets of
the Company and/or its subsidiaries. In October of 2015, the Company contacted the holder of the SNC Note regarding the return
of the SNC Collateral to the holder in satisfaction of the SNC Note. By letter agreement dated February 18, 2016, the Company
agreed to return the SNC Collateral to the holder of the SNC Note, and the holder agreed to discharge the Company of all of its
obligations and liabilities under the SNC Note upon receipt of the assets. As of the date of this report, the collateral has not
been accepted by the holder of the SNC Note and the SNC Note remains outstanding (see note 9).
Pursuant
to ASC 825-10-25-1,
Fair Value Option,
the Company made an irrevocable election at the time of issuance to report the note
at fair value, with changes in fair value recorded through the Company’s statement of operations as Other expense/income
in each accounting period. At March 31, 2016, the fair value of the SNC Note was $0.2 million, (see note 5 for further information)
and the principal amount due was $3.3 million.
5.
FINANCIAL INSTRUMENTS
Fair
Value Measurements
Fair
value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. When determining the fair value measurements for assets and liabilities that
are required to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact
and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such
as inherent risk, transfer restrictions and credit risk.
The
Company applies the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels
and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair
value measurement:
Level
1 – Quoted prices in active markets for identical assets or liabilities.
Level
2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for
identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by
observable market data for substantially the full term of the assets or liabilities.
Level
3 – Inputs that are generally unobservable and typically reflect management’s estimates of assumptions that market
participants would use in pricing the asset or liability.
VERITEQ
CORPORATION
CONDENSED
NOTES TO FINANCIAL STATEMENTS
March
31, 2016
(unaudited)
During
the three months ended March 31, 2016 and the year ended December 31, 2015, the SNC Note (which the Company elected to be accounted
for at fair value), the bifurcated embedded option in other convertible notes and the warrant liabilities were valued using Level
3 inputs. The changes in fair value of the SNC Note, the bifurcated embedded option in the convertible notes and the warrant liability
during the three months ended March 31, 2016 and the year ended December 31, 2015 are reflected in the changes in fair value of
derivative and other fair valued instruments in the Company’s statement of operations.
As
of March 31, 2016 the fair value of the convertible subordinated debt was determined using a discounted cash flow model. The fair
value of the November 2013 Warrants and the bifurcated embedded option in the convertible notes were determined using various
Monte Carlo simulations.
The
following table summarizes our financial assets and liabilities measured at fair value as presented in the balance sheets as of
March 31, 2016 and December 31, 2015 (in thousands):
|
|
March 31, 2016
|
|
|
December 31, 2015
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subordinated debt
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
230
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
370
|
|
Bifurcated option in convertible notes
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,611
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,337
|
|
Warrant liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,429
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,410
|
|
The
following is a summary of activity of Level 3 liabilities for the three months ended March 31, 2016:
|
|
SNC Note
|
|
|
Bifurcated embedded option in convertible
notes
|
|
|
Warrant liabilities
|
|
Balance at December 31, 2015
|
|
$
|
370
|
|
|
$
|
5,337
|
|
|
$
|
1,410
|
|
Issuance of additional debt
|
|
|
|
|
|
|
177
|
|
|
|
|
|
Conversion of notes into share of common stock
|
|
|
|
|
|
|
(46
|
)
|
|
|
|
|
Loss (Gain) on change in fair value
|
|
|
(140
|
)
|
|
|
3,143
|
|
|
|
19
|
|
Balance at March 31, 2016
|
|
$
|
230
|
|
|
$
|
8,611
|
|
|
$
|
1,429
|
|
6.
STOCKHOLDERS’ DEFICIT
Preferred
Stock
As
of March 31, 2016, and December 31, 2015, the Company has authorized 5 million shares of preferred stock, par value $0.01 per
share, with 1,841 shares of Series D Preferred Stock outstanding. On April 29, 2016, Mr. Silverman transferred his Series D shares
to a third party lender of the Company and Mr. Geissler relinquished his shares of Series D Preferred Stock and there remained
1,400 outstanding shares of Series D Preferred Stock as of that date.
VERITEQ
CORPORATION
CONDENSED
NOTES TO FINANCIAL STATEMENTS
March
31, 2016
(unaudited)
Common
Stock
As
previously discussed in note 1, the February 2015 Reverse Stock Split became effective on February 11, 2015, and the July 2015
Reverse Stock Split became effective on July 29, 2015. All share, per share and capital stock amounts have been retroactively
restated as of March 31, 2016, and December 31, 2015 to give effect to the reverse stock splits. In conjunction with the effectiveness
of the July 2015 Reverse Stock Split, the number of common shares that the Company is authorized to issue increased to 100 billion.
Warrants
Deemed as Liabilities
On
November 13, 2013, in connection with the issuance of the November 2013 Notes, the Company issued the November 2013 Warrants,
which are more fully described in Note 5 of the December 31, 2015 consolidated financial statements. The November 2013 Warrant
agreements provide that if the Company were to issue or sell any shares of its common stock, except certain specified issuances
pursuant to the Company’s stock plans or the issuance of common stock pursuant to agreements existing on November 13, 2013,
at a price per share less than the exercise price in effect immediately before the issuance or sale, then immediately after such
dilutive issuance, the exercise price will be reduced. If there is an adjustment to the exercise price as a result of any of the
dilution events specified in the Warrant agreements, the number of shares of common stock that may be purchased upon exercise
of the warrant will be increased or decreased proportionately, so that after such adjustment the aggregate exercise price payable
for the adjusted number of shares shall be the same as the aggregate exercise price in effect immediately prior to such adjustment
(without regard to any limitations on exercise).
During
the year ended December 31, 2015, the Company issued the March 2015 Warrant (see note 3). The March 2015 Warrant is exercisable
at any time until three years after the date of issuance. The terms of the warrant provides for a proportional downward adjustment
of the exercise price in the event that the Company issues or sells, or is deemed to have issued or sold, shares of common stock
at an issuance price that is less than the market price of the common stock at the time of issuance, as defined in the warrant
agreement. The Company determined that the fair value of the March 2015 Warrant was de minimus at the time of issuance and at
March 31, 2016 and December 31, 2015.
The
terms of the March 2015 Warrant and the November 2013 Warrants are such that they do not qualify for equity treatment under ASC
815 and are classified as liabilities at March 31, 2016 and December 31, 2015. The carrying amount of the warrant liabilities
approximate management’s estimate of their fair value (see note 5) and were determined to be $1.4 million and $1.4 million
at March 31, 2016 and December 31 2015, respectively. The Company recognized expense of $19,875 in the three months ended March
31, 2016 as a result of the change in fair value of the November 2013 Warrants.
Stock
Options and Restricted Stock
In
accordance with the Compensation – Stock Compensation Topic of the Codification, awards of stock options are recorded at
fair value on the date of grant and compensation cost is recognized on a straight line basis over the service period of each award.
Upon exercise of stock options, the Company’s policy is to issue new shares from its authorized but unissued balance of
common stock outstanding that have been reserved for issuance under the Company’s stock option plans.
VERITEQ
CORPORATION
CONDENSED
NOTES TO FINANCIAL STATEMENTS
March
31, 2016
(unaudited)
On
August 13, 2015, the Compensation Committee of the Company’s 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 Company’s 2014 Stock Incentive 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 were to have vested on January 2, 2017 or upon a change of control. On April 28, 2016, all of the recipients of the
restricted stock grants agreed to relinquish their shares and rescind their grants in their entirety. As a result, in
accordance with ASC 718, no compensation expense was recorded for the restricted stock grants and the shares were not
reflected as outstanding as of March 31, 2016 and December 31, 2015.
|
|
Options
|
|
|
Weighted average
|
|
|
|
quantity
|
|
|
exercise price
|
|
Options outstanding as of December 31, 2015
|
|
|
123,500,000
|
|
|
$
|
0.036
|
|
Options granted
|
|
|
-
|
|
|
|
-
|
|
Options exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeitures
|
|
|
-
|
|
|
|
-
|
|
Options outstanding as of March 31, 2016
|
|
|
123,500,000
|
|
|
$
|
0.036
|
|
7.
RELATED PARTY TRANSACTIONS
Included
in accrued expenses at March 31, 2016 and December 31, 2015 are approximately $0.8 million and $0.9 million, respectively, owed
to the Company's officers and directors. See note 3 for a discussion of related party notes and loans payable. On April 28, 2016,
$0.6 million of the amounts owed to officers as of December 31, 2015 were discharged by written consent and the Company no longer
has any obligation to pay these amounts as of that date (see Note 9). The written consent also relieved the Company of its obligations
under executive employment agreements with Mr. Silverman and Mr. Geissler, former officers.
8.
COMMITMENTS AND CONTINGENCIES
In
connection with the Stock Purchase Agreement entered into on November 25, 2015 (see note 15), the Company entered into a consulting
agreement with a third party under which the Company is required to pay a consulting fee of $50,000 upon the closing of the transaction,
and to issue a 3 year warrant to purchase 2.99% of the Company’s common stock at an exercise price of $0.01 per share with
a cashless exercise provision to the consultant. The Company paid $10,000 of the amount in 2015 and accrued $40,000 in May 2016.
As
a result of the foreclosure and disposal of the Company’s VAC subsidiary, approximately $2.6 million of liabilities were
deconsolidated. There is a possibility that creditors could pursue claims against the Company in connection with these liabilities.
In October 2015, the Company executed five Consent and Release Agreements
with five different noteholders. The related notes totaled $755,620. The Company’s interpretation of the Consent and Release
Agreements was that all the associated debt related to these note holders was forgiven. The noteholders allege the debt is still
outstanding. As of March 31, 2016 the debt is recorded on the books of the Company until this dispute is resolved. In April 2016,
one of the noteholders forgave $319,000 of his notes in connection with a separate release agreement.
In February 2017
the Company received notice of a filing of a lawsuit from a party claiming rights as a partial assignee of debt held by a prior
lender to the Company. The lawsuit alleges damages consisting of principal, interest and costs totaling $374,742. The Company
has not determined the validity of the claim or potential defenses to the lawsuit. However, to the extent that the claim
is based on notes from a lender of record of the Company, all appropriate amounts for principal and interest are believed to be
recorded in the Company’s records as of the balance sheet date.
9.
SUBSEQUENT EVENTS
Issuance
of Convertible Notes
On
June 14, 2016, the Company issued additional promissory notes in the aggregate principal amount of $668,502, for which the
Company received proceeds of $47,000, net of $53,000 paid directly to vendors and $5,000 of original issue discounts and
$563,502 to consolidate and refinance certain previously issued promissory notes with the same lender aggregating $536,670.
The two lenders were also issued warrants for 1,565,286 and 291,667 common shares exercisable at $0.1755 and $0.1755 per
share (with cashless exercise rights) which warrants expire on June 14, 2018. These notes are due one year after the date of
issuance, bear interest at rates of 12% per annum, and are convertible into shares of common stock at the lesser of (i)
$0.015 per share or (ii) 60% of the average of the three lowest trading prices of the Company’s common stock during the
10 days prior to conversion.
VERITEQ
CORPORATION
CONDENSED
NOTES TO FINANCIAL STATEMENTS
March
31, 2016
(unaudited)
On
August 16, 2016 the Company issued a convertible promissory note with a principal amount of $52,500 for which the Company received
$45,000 in proceeds net of original issue discount of $2,500 and deferred financing costs of $5,000. This note is due one year
after the date of issuance, bears interest at a rate of 12% per annum, and is convertible into shares of common stock at the lesser
of (i) $0.18 per share or (ii) 60% of the average of the three lowest trading prices of the Company’s common stock during
the 15 days prior to conversion.
With
respect to the foregoing notes, in the event the Company were to issue or sell, or is deemed to have issued or sold, any shares
of common stock for a consideration per share (the “New Issuance Price”) that is less than the conversion price in
effect immediately prior to such issue or sale or deemed issuance or sale (a “Dilutive Issuance”), then, immediately
after such Dilutive Issuance, the conversion price then in effect is reduced to an amount equal to the New Issuance Price.
These
above notes include embedded conversion options which will be bifurcated and accounted for as derivative liabilities at fair value
(see Note 2). For warrant instruments the Company classifies such instruments as liabilities at their fair values at the time
of issuance and adjusts the instruments to fair value at each reporting period. These liabilities are subject to re-measurement
at each balance sheet date until extinguished either through conversion or exercise, and any change in fair value is recognized
in the Company’s statements of operations.
Senior
Secured Credit Facility Agreement and Convertible Promissory Note
On
September 30, 2016 with an effective date of November 10, 2016 the Company executed a Senior Secured Credit Facility Agreement
(the “Agreement”) by and among: (i) the Company; (ii) BRACE SHOP, LLC, a limited liability company organized under
the laws of the State of Florida, BRACESHOP REAL ESTATE HOLDINGS, LLC, a Florida limited liability company (each individually,
a “Corporate Guarantor” and collectively, the “Corporate Guarantors”); (iii) any Person to hereafter become
a Subsidiary of the Borrower as defined, and any Person that from time to time may hereafter become liable for the Obligations,
or any part thereof, as joint and several guarantors (the “Additional Guarantors”) (the Corporate Guarantors and the
Additional Guarantors, together, jointly and severally, the “Guarantors” and together with the Borrower, the “Credit
Parties”); and (iv) TCA GLOBAL CREDIT MASTER FUND, LP, a limited partnership organized and existing under the laws of the
Cayman Islands, as lender (the “Lender”). The Lender extended a senior secured credit facility to the Company of up
to One Million and No/100 United States Dollars (US$1,000,000.00) for working capital financing for the Company and its Subsidiary,
and for any other purposes permitted.
The
line is joint and severally guaranteed by the subsidiaries of the Company, the Company’s CEO/Director and by the CEO’s
wife, who is a director of the Company. The CEO and his wife have also pledged their equity holdings in the Company and its subsidiaries
and the Company has pledged its equity holdings in the Company’s subsidiaries. Additionally, the line is secured under a
first priority security interest by substantially all assets of the Company and its subsidiaries and the line is subject to negative,
affirmative and financial covenants as defined in the Agreement.
VERITEQ
CORPORATION
CONDENSED
NOTES TO FINANCIAL STATEMENTS
March
31, 2016
(unaudited)
On
November 10, 2016, the Company issued a convertible promissory note with a principal amount of $750,000 for which the
Company received $315,638 in proceeds net of deferred financing fees of $56,400, a payment made directly to a noteholder of
$84,050, a payment made directly to a line of credit of $281,771 and a payment made directly to paydown state taxes of
$12,141. This note is due on May 10, 2018, eighteen months after the effective date and bears interest at a rate of 18% per
annum. At any time while this Note is outstanding, but only upon: (i) the occurrence of an Event of Default under any of the
Loan Documents; or (ii) mutual agreement between the Borrower and the Holder, the Holder may convert all or any portion of
the outstanding principal, accrued and unpaid interest, Premium, if applicable, and any other sums due and payable hereunder
or under any other Loan Documents (such total amount, the “Conversion Amount”) into shares of Common Stock of the
Company (the “Conversion Shares”) at a price equal to: (i) the Conversion Amount (the numerator); divided by (ii)
eighty-five percent (85%) of the lowest of the daily volume weighted average price of the Borrower’s Common Stock
during the five (5) Business Days immediately prior to the Conversion Date, which price shall be indicated in the conversion
notice. This note includes an embedded conversion option which will be bifurcated and accounted for as a derivative liability
at fair value (see Note 2). In connection with this convertible promissory note the Company entered into an Advisory Services
Agreement with the lender dated November 10, 2016 where a range of advisory services were rendered which may, or may not,
have included (i) identifying, evaluating and advising in relation to the Company's current structural (including business
model), financial, operational, managerial, strategic and other needs and objectives, (ii) preparing and coordinating with
the Company and others in the development of business plans, and financial models, (iii) identifying potential merger,
acquisition, divestiture, consolidation or other combination ("M&A Transaction") opportunities and negotiating,
structuring and advising in connection with potential M&A Transactions, (v) advising and assisting the Company in
connection with the preparation of any registration statements, periodic or other SEC reports or proxies, and
(vi) coordinating with, and advising in connection with the activities of, Outside Professionals, including without
limitation attorneys, accountants, market professionals, etc.
The
compensation for these services was $337,500. The management advisory services payable is fully secured under the loan documents
and has been expensed as professional fees as of November 10, 2016, the period the management advisory services were provided.
The convertible promissory note and the Advisory Service Agreement have the following repayment terms; commencing December 18,
2016 there will be three payments of interest only totaling $11,250; the following fourteen months the Company will repay principal,
interest and $5,000 toward the Advisory Service Agreement totaling monthly payments of $61,208. The eighteenth payment will be
comprised of principal, interest and a balloon payment of $267,500 related to the Advisory Service Agreement.
Loan
Agreement
On
October 1, 2016 (Execution Date) the Company executed a loan agreement with a third party (Lender) the terms of the loan agreement
include issuance of a promissory note dated October 1, 2016 with a principal amount of $42,250, for which the Company proceeds
of $32,500 net of an OID of $9,750; beginning on the date that is one month following the Execution Date, and continuing on the
same calendar day of each successive month thereafter, the Lender shall invest an amount equal to $12,500, until the Lender has
invested an aggregate amount of $70,000 (the Purchase Price). In return for each subsequent investment the Company shall
issue the Lender notes in the original principal amount of $16,250 per note; beginning on the fifteenth calendar day of the month
that is six months following the Execution Date, and continuing on the same calendar day of each successive month thereafter,
the Company shall make payments in cash to the Lender until a total of $91,000 has been paid to the Lender, the amount of each
cash repayment shall be equal to 50% of the Company's net profit earned in the month prior to the month of the applicable cash
payment. Net profit shall be defined as net revenue minus cost of goods sold and marketing expenses less $73,000. As
of the date of this report the November 1, 2016 and December 1, 2016 loans have not been received by the Company.
SNC
Assets
The
SNC Note (see note 4) is secured by all of the assets, consisting primarily of intellectual property and certain tangible
property and equipment (the “SNC Collateral”), acquired by the Company under the asset purchase agreement entered
into by the Company and SNC Holdings Corp. on November 30, 2012. Under the terms of the SNC Note, as amended, which was due
on June 30, 2015 and has not been repaid, the holder of the SNC Note may look solely to the SNC Collateral to satisfy all
obligations of the Company to it under the SNC Note and not to any other assets of the Company and/or its subsidiaries. In
October of 2015, the Company contacted the holder of the SNC Note regarding the return of the SNC Collateral to the holder in
satisfaction of the SNC Note. By letter agreement dated February 18, 2016, the Company agreed to return the SNC Collateral to
the holder of the SNC Note, and the holder agreed to discharge the Company of all of its obligations and liabilities under
the SNC Note upon receipt of the SNC Collateral. In November 2016 the Company returned the SNC Collateral to the holder of
the SNC Note, but the holder has not yet accepted such collateral and the debt remains outstanding.
VERITEQ
CORPORATION
CONDENSED
NOTES TO FINANCIAL STATEMENTS
March
31, 2016
(unaudited)
Acquisition
of Brace Shop
On
November 25, 2015, the Company entered into a Stock Purchase Agreement (the “Purchase Agreement”) with The Brace Shop,
LLC, a Florida limited liability company (“Brace Shop”) and Lynne Shapiro (the “Seller”), whereby the
Company agreed to acquire (the “Acquisition”), all of the issued and outstanding membership interests (the “Stock”)
of Brace Shop. The Company incurred approximately $125,000 and $165,000, respectively of expenses during the three months ended
March 31, 2016 and the year ended December 31, 2015 in connection with the Purchase Agreement, which is reflected in Selling,
general and administrative expenses in the Company’s statement of operations. Brace Shop operates as an online retailer
of orthopedic braces and related medical devices and had revenues of approximately $1.7 million for the three months ended March
31, 2016 and March 31, 2015.
The
acquisition of Brace Shop was completed on May 6, 2016, at which time Brace Shop became a wholly owned subsidiary of the
Company. Pursuant to the terms of the Purchase Agreement, the Company paid (i) $250,000 in cash to Mrs. Lynne Shapiro, (ii)
849 shares of its newly designated Series E Convertible Preferred Stock (“Series E Preferred Stock”), which is
convertible into 84.9% of the issued and outstanding shares of the Company’s common stock on a fully diluted basis, and
has voting rights on an as converted basis and (iii) a goldenshare in the form of a 5-year warrant (the
“Goldenshare”), exercisable at $0.00001 per share with a cashless exercise provision for that number of shares of
common stock required to insure that the Series E Preferred Stock issued as part of the purchase price to Mrs. Lynne Shapiro
is convertible into 84.9% of the issued and outstanding shares of the Company’s common stock, on a fully diluted basis.
At the closing of the transaction, Mr. Silverman received 39 shares of the Series E Preferred Stock convertible into 3.9% of
the issued and outstanding Common Stock on a fully-diluted basis. The shares of Series E Preferred Stock and the Goldenshare
shall not be convertible until the six (6) month anniversary of the closing of the transaction. Further, once a majority of
the outstanding Series E Preferred Stock has been converted into common stock, then any other Series E Preferred Stock then
outstanding shall automatically be deemed converted into common stock on the fifth business day following the date that a
majority of the outstanding Series E Preferred Stock is converted into common stock.
The
foregoing transaction was accounted for as a reverse acquisition and recapitalization of Brace Shop. Accordingly, the Brace Shop
historical financial statements as of the period ends, and for the periods ended prior to the acquisition will become the historical
financial statements of the Company prior to the date of the reverse acquisition.
The
aggregate cash payment of $250,000 to the Seller was financed by the sale of senior secured convertible promissory notes in the
aggregate principal amount of $294,118 (the “Acquisition Notes”) to an institutional investor who previously purchased
convertible debt from the Company (the “Investor”). The Acquisition Notes bear interest at a rate of 12% per annum,
with principal and interest due one year from the date of issuance. The Acquisition Notes are convertible into shares of the Company’s
Common Stock at a conversion price equal to the lesser of (i) $0.015 per share or (ii) 60% of the average of the three lowest
trading prices during the ten trading days prior to conversion, and contain full-ratchet anti-dilution provisions similar to those
of convertible notes previously issued by the Company. The embedded conversion option contained in the Acquisition Notes will
be bifurcated and reflected as a derivative liability at fair value. The Company currently anticipates that the $50,000 consulting
fee and all other costs and expenses related to the Acquisition and the Company’s ongoing operations will be funded through
the sale of additional senior secured convertible promissory notes to the Investor on terms substantially identical to that of
the Acquisition Notes.
VERITEQ
CORPORATION
CONDENSED
NOTES TO FINANCIAL STATEMENTS
March
31, 2016
(unaudited)
The
Purchase Agreement contemplates that all interest, principal and any other required payments on all debt instruments of the Company
that are outstanding as of the date of the Purchase Agreement (but excluding the Acquisition Notes) shall only be paid through
the issuance of shares of common stock. All options, warrants, shares of preferred stock and other securities of the Company outstanding
as of the date of the Purchase Agreement are to remain in place on the terms set forth in each of such securities, except that
all options, warrants and shares of preferred stock are to be converted into common stock within six months of the date of closing
of the Acquisition or cancelled.
Forgiveness
of Certain Debt and Preferred Stock Series D
As
of December 31, 2015 the Company had outstanding accrued salaries and bonuses payable to two former officers totaling $565,950.
In January 2016 the Company made payments of $9,550 related to the outstanding accrued salaries and bonuses. In April 2016 the
two former officers agreed to release the Company from all outstanding accrued salaries and bonuses due to them totaling $556,400.
The Company accounted for the above transaction recognizing a gain in the statement of operations of $202,125 for one officer
and a gain posted to additional paid in capital of $354,275 for the other officer who was a related party.
In
April 2016 one former officer agreed to release the Company from a loan payable due to him totaling $319,000 and to the cancellation
of 441 Series D shares that he owned. The Company accounted for the above transaction recognizing a gain in the statement of operations
of $319,000 and a gain of $441,000 in additional paid in capital resulting from the cancellation of the 441 Series D shares.
In
April 2016 one former director of the Company agreed to the cancellation of stock options for 15,000,000 shares, which were held
by him.
Transfer
of Former Officer’s Loans Payable and Preferred Stock to a Lender of the Company
In
February 2016, as amended in April 2016, in a private transaction between a lender of the Company and a former officer, the lender
purchased $194,010 of notes payable due to the officer and 1,400 shares of Series D preferred stock held by the officer.
In
September 2016 the Company amended its Certificate of Incorporation to amend the authorized common shares to 100 million from
100 billion. This change has been retroactively presented in the balance sheet.
VERITEQ
CORPORATION AND SUBSIDIARIES