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VERITEQ - 10-Q/A - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) Cautionary Note Regarding Forward-Looking Statements This quarterly report contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These statements concern expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. Specifically, this quarterly report contains forward-looking statements including, but not limited to: ? that our ability to continue as a going concern is dependent upon our ability to obtain financing in the coming days to fund our operations, the continued development of our products and our working capital requirements; ? our expectation that operating losses will continue for the foreseeable future, and that until we are able to achieve profits, we intend to continue to seek to access the capital markets to fund the development of our products; ? that our cash position is critically low and that we need to raise additional funds in the coming days to fund our operations and that we may not be able to obtain additional debt or equity financing on favorable terms, if at all; ? that our revenue from our Q Inside Safety Technology will continue to increase and that we will realize revenue from sales of our dosimeter products beginning in 2015; ? our expectations and expected trends with respect to the potential microtransponder revenue and scanner revenue for the breast implant, vascular port and artificial joint markets; ? that if our products fail to gain market acceptance, we will be unable to achieve the necessary revenues which will allow us to remain in business; ? that our results may differ materially from those reflected in our forward looking statements; ? that our products have certain technological advantages, but maintaining these advantages will require continual investment for development and in sales and marketing; ? that we intend to continue to explore strategic acquisition opportunities of businesses that are complementary to ours; ? our ability to preserve our intellectual property and trade secrets and operate without infringing on the proprietary rights of third parties; ? that we will have the funds necessary to fund our business for the twelve months ended March 31, 2015; ? that we will realize the full gross proceeds from the November 2013 financing; ? our ability to maintain compliance with the provisions of the notes and warrants and related agreements from the November 2013 financing; ? that we believe that we will have the financial ability to make all payments with respect to the November 2103 financing; ? that any amount is owed under the terms of the manufacturing agreement with our subsidiary, Signature Industries Limited and that we will have the funds necessary to pay amounts that may become due as a result of the liquidation of Signature Industries Limited, which is in process; ? that our results of operations are not materially impacted by moderate changes in the inflation rate; ? the potential of further dilution to our common stock based on transactions effected involving issuance of shares; ? volatility in our stock price; ? our ability to continue to execute all required filings, tax returns, maintain insurance and perform other required activities to maintain our standing as a publicly-trading company; ? our ability to add employees during 2014 and beyond as we begin to ship our products and to grow our business; ? our ability to establish and maintain proper and effective internal accounting and financial controls; ? our ability to comply with current and future regulations related to our business; and ? our actual results may differ materially from those reflected in forward-looking statements as a result of: (i) the risk factors described under the heading "Risk Factors" in our Annual Report on Form 10-K for the year ending December 31, 2013, as amended and in our other public filings, (ii) general economic, market, regulatory or business conditions, (iii) the opportunities (or lack thereof) that may be presented to and pursued by us, (iv) competitive actions by other companies, (v) changes in laws, and (vi) other factors, many of which are beyond our control. In some cases, you can identify forward-looking statements by terms such as "may," "should," "could," "would," "anticipates," "expects," "attempt," "intends," "plans," "hopes," "believes," "seeks," "estimates" and similar expressions intended to identify forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from estimates or forecasts contained in the forward-looking statements. Some of these risks and uncertainties are beyond our control. Also, these forward-looking statements represent our estimates and assumptions only as of the date the statement was made. 27 -------------------------------------------------------------------------------- The information in this quarterly report is as of March 31, 2014, or, where clearly indicated, as of the date of this filing. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. We also may make additional disclosures in our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K that we may file from time to time with the Securities Exchange Commission, or SEC. Please also note that we provided a cautionary discussion of risks and uncertainties in our Annual Report on Form 10-K for the year ended December 31, 2013 as amended. These are factors that could cause our actual results to differ materially from expected results and they should be reviewed carefully. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes included in Item 1 of this report as well as our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC on April 15, 2014 as amended on August 19, 2014. Overview During April 2013, VeriTeQ Corporation's (formerly Digital Angel Corporation) ("VC") and VeriTeQ Acquisition Corporation's ("VAC") boards of directors began discussions to combine the companies as they believed that combining the companies and focusing on the medical device industry would result in the achievement of greater stockholder value. On June 24, 2013, VC acquired its wholly-owned subsidiary, VAC, pursuant to the terms of a share exchange agreement (the "Exchange Agreement") pursuant to which VC became the legal acquirer of VAC and VAC became the accounting acquirer of VC pursuant to the terms of the Exchange Agreement, which closed on July 8, 2013 (the "VeriTeQ Transaction"). In January 2012, VAC acquired all of the outstanding stock of PositiveID Animal Health Corporation ("PAH") a Florida corporation from PositiveID Corporation, which was then a related party. In December 2012, VAC formed a subsidiary, VTQ IP Holding Corporation, a Delaware corporation. VAC was founded in December 2011 and is engaged in the business of radio frequency identification technologies ("RFID") for the Unique Device Identification ("UDI") of implantable medical devices, and radiation dose measurement technologies for use in radiation therapy treatment. The Exchange Agreement and the VeriTeQ Transaction are more fully described in Note 1 to the accompanying unaudited condensed consolidated financial statements. As a result of the VeriTeQ Transaction, our operations now consist primarily of 13 U.S.-based corporate employees, and five board members, three of whom are non-employee board members. We added four employees during the fourth quarter of 2013 as we began to ship our products and two employees during the first quarter of 2014: our new chief legal and financial officer and a former consultant. Our plan is to outsource our manufacturing operations and to maintain a lean organizational structure. VeriTeQ is in the development stage as defined by Accounting Standards Codification subtopic 915-10 Development Stage Entities, or ASC 915-10, and its success depends on its ability to obtain financing and realize its marketing efforts. To date, VeriTeQ has generated minimal sales revenue, has incurred expenses and has sustained losses. Consequently, its operations are subject to all the risks inherent in the establishment of a new business enterprise. Our headquarters is located in Delray Beach, Florida. We expect to continue to execute all required filings, tax returns and perform other required activities to maintain our standing as a publicly-traded company. Also see the discussion below under the heading Liquidity and Capital Resources, which discusses our expectations regarding liquidity and our ability to continue as a going concern. Critical Accounting Policies Our critical accounting policies are presented in Note 1 to our consolidated financial statements included in our Annual Report on Form 10-K for the year-ended December 31, 2013 filed with the SEC on April 15, 2014. Impact of Recently Issued Accounting Standards For information regarding recent accounting pronouncements and their expected impact on our future consolidated results of operations or financial condition, see Note 1 to our accompanying unaudited condensed consolidated financial statements. 28 -------------------------------------------------------------------------------- Results of Operations Our consolidated operating activities used cash of $0.5 million and $0.2 million during the three-months ended March 31, 2014 and 2013, respectively. As of March 31, 2014, our cash on hand totaled $2 thousand compared to $13 thousand as of December 31, 2013. As of March 31, 2014, our stockholders' deficit was $9.3 million, and as of March 31, 2014, we had an accumulated deficit of $15.2 million. Our consolidated net income (loss) was $4.6 million and $(1.3) million for the three-months ending March 31, 2014 and 2013, respectively, and $(15.2) million from December 14, 2011 (Inception) to March 31, 2014. We are a development stage company through March 31, 2014. We recorded approximately $18 thousand and $74 thousand of revenue from sales of our Q Inside Safety Technology products during the fourth quarter of 2013 and first quarter of 2014, respectively. Our profitability and liquidity depend on many factors, including our ability to successfully develop and bring to market our products and technologies the maintenance and reduction of expenses, and our ability to protect the intellectual property rights of VeriTeQ and others that we may acquire. We need to raise additional funds immediately and continuing until we begin to ship our products - see "Liquidity and Capital Resources" below. Three-Months Ended March 31, 2014 Compared to March 31, 2013 Revenue and Gross Profit We generated $74 thousand of revenue and $36 thousand of gross profit during the three-months ended March 31, 2014 related to the sale of our Q Inside Safety Technology products - microtransponders and readers/scanners. We did not generate any revenue and gross profit during the three-months ended March 31, 2013. We expect our revenue to continue to increase during 2014 and beyond as we fulfill orders under our existing development and supply contract with Establishment Labs and as we obtain new customers. During 2014, we expect the majority of revenue generated to be related to sales our Q Inside Safety Technology products for the breast implant market. We hope to begin realizing revenue from sales of our dosimeter products beginning in 2015. Selling, General and Administrative Expenses Selling, general and administrative expenses were $1.3 million for the three-months ended March 31, 2014 compared to selling, general and administrative expenses of $1.0 million for the three-months ended March 31, 2013. The $0.3 million increase in selling, general and administrative expense was due primarily to an increase in investor relations services expenses, higher personnel related costs and higher insurance and accounting expenses. These additional costs were incurred to support our growth and to handle the additional demands created by our becoming a public company as a result of the VeriTeQ Transaction, which closed on July 8, 2013. Partially offsetting the increase was a reduction in non-cash compensation expense of approximately $0.2 million in the three-months ended March 31, 2014 as compared to the three-months ended March 31, 2013 as we had fewer stock options vesting in the current period. We expect our selling, general and administrative expenses to remain at the current level during 2014 and to increase in future years as we grow our business. Development Expenses Development expense was $64 thousand for the three-months ended March 31, 2014 and $6 thousand for the three months ended March 31, 2013. Development expenses for the three-months ended March 31, 2014 consist primarily of salaries and benefits and consulting expenses related to ongoing efforts to develop client and end user application programming interfaces, or APIs. The development expenses for the three-months ended March 31, 2013 were for product testing costs. We expect development expenses to continue to increase during 2014 and beyond as we focus more efforts on expanding our technology products' features, database development and creating new applications for our products. Depreciation and Amortization Expense We incurred $0.1 million and $0.1 million of amortization expense for the three months ended March 31, 2014 and 2013, respectively. The expense related primarily to technology, customer relationship and trademarks resulting from two acquisitions during 2012. We expect depreciation and amortization expense to remain at the current levels during most of 2014 and for the expense to increase in future years as we expand our business operations. 29 -------------------------------------------------------------------------------- Operating Loss Operating loss was approximately $1.5 million for the three-months ended March 31, 2014 compared to an operating loss of approximately $1.1 million for the three- months ended March 31, 2013. The increase in the loss was primarily due to the increase in selling, general and administrative expenses, which are more fully discussed above. Change in Value of Convertible Debt with Embedded Option Feature Change in value of convertible debt with embedded option feature was approximately $2.4 million for the three months ended March 31, 2014. We did not incur a change in value of convertible debt with embedded option feature during the three-months ended March 31, 2013. The note was entered into in December 2012 in connection with the acquisition of our dosimeter technology assets. The debt is convertible into one-third of the shares of the Company's common stock held beneficially by our CEO. As long as the debt remains outstanding, increases in our stock price will result in other expense and reductions in our stock price will result in other income. Change in Value of Conversion Option of Convertible Notes Change in value of the conversion option of convertible notes was approximately $1.1 million for the three months ended March 31, 2014. We did not incur a change in value of conversion option of convertible notes during the three-months ended March 31, 2013. These notes with an embedded derivative (conversion option) were entered into on November 13, 2013 in connection a financing. As long as the notes remain outstanding, changes in the fair value of the conversion options will result in other expense/income. Change in Value of Warrant Liabilities Change in value of warrant liabilities was approximately $3.1 million for the three-months ended March 31, 2014. We did not incur a change in value of warrant liabilities during the three-months ended March 31, 2013. The warrants were issued in connection with a financing in November 13, 2013 and are being revalued each reporting period with changes in the value being reported as other income or expense. Other Expense Other expense was $56 thousand for the three months ended March 31, 2014. We did not incur other expense during the three-months ended March 31, 2013. Other expense was the loss recognized on the settlement of the receivable from the sale of DARC during the three-months ended March 31, 2014. Interest Expense Interest expense was $0.5 million and $0.2 million for the three months ended March 31, 2014 and 2013, respectively. The interest expense for the three-months ended March 31, 2014 relates primarily to a financing we entered into in November 2013. A significant portion of our interest expense in both periods is non-cash interest expense. All but approximately $7 thousand of the interest expense for the three-months ended March 31, 2014 resulted from the accretion of debt discount for the notes issued in the November 2013 financing. The remaining interest expense for the three months ended March 31, 2014 and 2013 relate to additional notes payable issued for working capital purposes and in the 2013 period for an asset acquisition. We will continue to record interest expense in connection with the accretion of debt discount for the notes issued in November 2013. At March 31, 2014, the current un-accreted balance of the debt discounts associated with the notes is approximately $1.1 million. If we enter into additional convertible debt financings, which include the issuances of warrants and beneficial conversion features, or if we modify the terms of our existing convertible debt and warrants we may be required to record significant interest expense in future periods. Benefit for Income Taxes While we realized net income for the three-months ended March 31, 2014, the income from the revaluations of the convertible note and warrants is a permanent difference and is, therefore, not included in taxable income for income tax purposes. In addition, we have incurred losses aggregating $15.2 million from December 14, 2011 (Inception) through March 31, 2014. Therefore, we have not recognized a benefit for income taxes during the three-months ended March 31, 2014 and 2013 and we have provided a full valuation allowance against our net deferred tax assets. Net Income (Loss) The net income was $4.6 million for the three-months ended March 31, 2014 compared to a net loss of $1.3 million for the three- months ended March 31, 2013. The net income for the three-months ended March 31, 2014 resulted primarily from the revaluation of the subordinated convertible debt with an embedded option feature, the change in the fair value of the conversion options of convertible notes and the revaluation of warrant liabilities. These liabilities are required to be revalued each reporting period. Excluding the other income from these revaluations, we incurred a loss for the three-months ended March 31, 2014 of approximately $2.0 million, which resulted from our efforts to commercialize our Q Inside Safety Technology products, costs associated with being a public company, including investor relation services fees, insurance and legal and accounting fees, non-cash compensation for a restricted stock grant that vests in January 2015, amortization of intangibles and interest expense, among other items. The loss for the three-months ended March 31, 2013 resulted from efforts in commercializing our Q Inside Safety Technology products, legal costs associated with the acquisition of the radiation dosimeter technology assets in December 2012, non-cash compensation for stock option and restricted stock grants, amortization of intangibles and interest expense. 30 -------------------------------------------------------------------------------- Environmental Action We have been informed by the New Jersey Department of Environmental Protection that a predecessor business sold a building in 2006 for which an environmental action has been claimed. The claim in being reviewed by the Company's outside legal counsel. We have not yet determined the impact on our financial condition or cash flows, if any. Changing Prices for Inflation We believe that our results of operations are not materially impacted by moderate changes in the inflation rate. Inflation and changing prices did not have a material impact on our operations in the three-months ended March 31, 2014 and 2013. Liquidity and Capital Resources As of March 31, 2014, cash was $2 thousand compared to $13 thousand at December 31, 2013. Net cash used in operating activities was $0.5 million and $0.2 million in the three months ended March 31, 2014 and 2013, respectively. In both periods, cash was used primarily for selling, general and administrative expenses. We used cash of $1 thousand to purchase fixed assets during the three-months ended March 31, 2014 and no cash was used or provided by investing activities during the three-months ended March 31, 2013. Net cash provided by financing activities totaled approximately $0.5 million in the three-months ended March 31, 2014. No cash was used or provided by financing activities during the three months ended March 31, 2013. The cash provided in the 2014 period was from the issuances of promissory notes. Adjustments to reconcile income (loss) to net cash used in operating activities included the following: Accounts payable increased to $1.0 million at March 31, 2014 from $0.9 million at December 31, 2013. The increase is due primarily to accounting and legal fees, patent maintenance fees, minimum royalties of $25 thousand that were billed in the current quarter and other amounts incurred for selling, general and administrative expenses. We continue to expect accounts payable to increase going forward until such time as we raise enough capital to pay the outstanding invoices, as well as due to the expanded efforts to commercialize our products. Accrued expenses increased to $3.3 million at March 31, 2014 from $2.7 million at December 31, 2013. The increase is due primarily to higher accrued payroll costs as all bonuses are being deferred, accrued investor relations services fees and accrued royalty obligations, among other items. We expect our accrued expenses to continue to increase until such time as we are able to raise enough capital to pay the deferred payroll and other accrued costs. The liability to a former related party under the shared services agreement remained constant at $0.2 million and $0.2 million at March 31, 2014 and December 31, 2013, respectively. We terminated the shared services agreement effective July 8, 2013. As we intend to outsource the manufacture of our Q Inside Safety Technology and other products, and to maintain "just-in-time" inventory levels, we do not currently anticipate having to make significant investments in fixed assets or inventory. Liquidity We are in the development stage, have incurred operating losses since our inception and we had a working capital deficit of approximately $4.8 million as of March 31, 2014. This compares to a working capital deficiency of approximately $3.1 million at December 31, 2013. We have excluded the non-cash liabilities for the conversion option of convertible debt in the calculation of working capital deficit. These factors raise substantial doubt about our ability to continue as a going concern. The accompanying condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from this uncertainty. Financing is required immediately and continuing to meet our liquidity needs. Our cash position is critically low, and payments critical to our survival are not being made in the ordinary course. 31 -------------------------------------------------------------------------------- On November 13, 2013, we entered into a financing, which is more fully discussed in Note 5 to the accompanying condensed consolidated financial statements. However, the financing was inadequate to meet our liquidity needs. Moreover, the funds generated from the financing to date have been limited due to the requirement that a significant portion of the proceeds be held in restricted bank accounts. At May 12, 2014, approximately $0.7 million of the proceeds from the November 13, 2013 financing, which includes approximately $0.1 million from the sale of the MGT common stock, is still held in the restricted bank accounts. In addition to the November 13, 2013 financing, since December 31, 2013 to May 12, 2014, we have received approximately $0.6 million from the issuances of other promissory notes of which approximately $0.2 million was from related parties. In order to have the funds necessary to pay: (i) existing accounts payable and accrued expenses; (ii) our notes payable that are due on demand or due within the next twelve months and, in particular, the promissory notes issued on November 13, 2013, which if not converted into common stock mature on November 13, 2014; (iii) the liability under the shared services agreement; and (iv) commitments for capital expenditures, as well as to develop and market our technology products, we need to raise additional capital immediately. We do not know whether such additional capital will be available to us or, if it is available, we do not know if the terms of any financing will be favorable or even acceptable. Our goal is to achieve profitability and to generate positive cash flows from operations. Our capital requirements depend on a variety of factors, including: (i) our ability to realize in full the proceeds under the November 13, 2013 financing discussed above and whether the notes issued in the November 13, 2013 financing will be converted to stock or be required to be repaid in cash on the maturity date; (ii) the cash required to service our other outstanding debt and in particular those promissory notes that are due on demand; (iii) the cash that will be required to fund our business operations, including the purchasing of capital expenditures related to molds and testing equipment for our Q Inside Safety Technology products; and (iv) the cash required to pay our existing accounts payable and accrued expenses, most of which are past due and/or on extended payment terms, among other items. Failure to have the funds held in the restrictive bank accounts released to us, to raise additional capital in the coming days to fund our operations and to generate positive cash flow from such operations will have a material adverse effect on our financial condition, results of operations and cash flows. Our historical sources of liquidity have included proceeds from the sale of businesses and assets, the sale of common stock, proceeds from the issuance of debt, including promissory notes issued to related parties, a shared services agreement with a former related party, the deferral of certain salary and bonuses payments to our senior executives and extended payment terms with certain of our vendors. In addition to these sources, other sources of liquidity may include the raising of capital through additional private placements or public offerings of debt or equity securities, the exercise of stock options, as well as joint ventures. However, going forward some of these sources may not be available, or if available, they may not be on favorable terms. If we were unable to obtain the funds necessary to fund our operations in the coming days, it will have a material adverse effect on our financial condition, results of operations and cash flows and result in our inability to continue operations as a going concern. These conditions indicate that there is substantial doubt about our ability to continue operations as a going concern, as we may be unable to generate the funds necessary to pay our obligations in the ordinary course of business. The accompanying financial statements do not include any adjustments related to the recoverability and classification of asset carrying amounts and classification of liabilities that may result from the outcome of this uncertainty. 32 -------------------------------------------------------------------------------- |