UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September~~June 30, ~~2015~~2016

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from______________to______________

Commission file number: 000-26020

VERITEQ CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

Delaware		43-1641533
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)
3333 S. Congress Avenue, Suite 401, Delray Beach, Florida		33445
6560 W. Rogers Circle, Suite 19 Boca Raton, Florida		33487
(Address of Principal Executive Offices)		(Zip Code)

(~~561~~954) ~~846~~574-~~7000~~9720

Registrant’s Telephone Number, Including Area Code

N/A

(Former Name, Former Address and Formal Fiscal Year, if Changed Since Last Report)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No þ

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☐ No þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one).

Large accelerated filer ☐	Accelerated filer ☐	Non-accelerated filer ☐	Smaller reporting company þ
		(Do not check if smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes þ☐ No ☐þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Class		~~March~~February 113, ~~2016~~2017
Common Stock, $0.00001 par value per share		~~250~~965,~~723,718~~635 shares

VERITEQ CORPORATION AND SUBSIDIARIES

TABLE OF CONTENTS

		Page
	PART I – Financial Information
Item 1.	Financial Statements (unaudited):
	Condensed Consolidated Balance Sheets – As of September 30, 2015 and December 31, 2014	3
	Consolidated Balance Sheets – As of June 30, 2016 and December 31, 2015	2
	Condensed Consolidated Statements of Operations – Three and Nine Months ended September 30, 2015 and 2014	4
	Consolidated Statements of Operations – Three and Six Months ended June 30, 2016 and 2015	3
	Condensed Consolidated Statement of Changes in Stockholders’ Deficit – For the nine months ended September 30, 2015	5
	Consolidated Statement of Changes in Stockholders’ Deficit – For the six months ended June 30, 2016	4
	Condensed Consolidated Statements of Cash Flows – Nine Months ended September 30, 2015 and 2014	6
	Consolidated Statements of Cash Flows – Six Months ended June 30, 2016 and 2015	5
	Notes to Condensed Consolidated Financial Statements	76
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1921
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	2628
Item 4.	Controls and Procedures	2628
	PART II – Other Information
Item 1.	Legal Proceedings	2729
Item 1A.	Risk Factors	2729
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	2729
Item 5.	Other Information	2729
Item 6.	Exhibits	2729
	Signature	2830

VERITEQ CORPORATION AND SUBSIDIARIES

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets

(in thousands, except par value)

	September 30, 2015			December 31, 2014
	(unaudited)
ASSETS
Current assets:
Cash	$	3		$	77
Restricted cash		12			12
Accounts receivable		-			11
Inventory		-			2
Other current assets		12			84
Total current assets		27			186
Property and equipment, net		26			35
Other assets		54			54
Intangible assets, net		973			1,470
Total assets	$	1,080		$	1,745
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable	$	1,275		$	1,141
Accrued expenses (including $1,341 and $1,171 to related parties)		3,221			2,511
Notes payable, current portion, net of discounts (including $966 and $152 to related parties)		4,811			2,480
Liabilities for conversion options of convertible notes		6,246			930
Subordinated debt with an embedded conversion option, at fair value		490			316
Total current liabilities		16,043			7,378
Notes payable, net of discount		-			286
Warrant liabilities at fair value		2,086			534
Estimated royalty obligations		440			440
Total liabilities		18,569			8,638
Commitments and contingencies (note 10)
Series D preferred stock ($0.01 par value; 1,841 shares outstanding)		1,841			1,841
Stockholders' deficit:
Preferred stock ($0.01 par value; 5 million shares authorized; 0 issued and outstanding		-			-
Common stock ($0.00001 par value; 100 billion shares authorized; 250,724 and * shares issued and outstanding)		3			-
Additional paid-in capital		22,106			15,000
Accumulated deficit		(41,439	)		(23,734	)
Total stockholders' deficit		(19,330	)		(8,734	)
Total liabilities and stockholders' deficit	$	1,080		$	1,745

* At December 31, 2014 the Company had 30 shares (unrounded) outstanding after giving retroactive effect to the reverse splits of 1:1,000 on February 11, 2015 and 1:10,000 on July 29, 2015

The accompanying notes are an integral part of these condensed consolidated financial statements.

VERITEQ CORPORATION AND SUBSIDIARIES

~~Condensed~~CONSOLIDATED ~~Consolidated~~FINANCIAL ~~Statements of Operations (unaudited)~~STATEMENTS

~~(in~~JUNE ~~thousands~~30, ~~except per share data)~~2016

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Sales	$	4		$	44		$	287		$	139
Cost of goods sold, exclusive of depreciation and amortization shown separately below		3			11			124			57
Gross profit		1			33			163			82
Operating Expenses:
Selling, general and administrative expenses		6,941			1,444			8,789			3,913
Development expenses		53			98			157			237
Asset impairment charge		-			-			380			-
Depreciation and amortization expense		29			150			122			448
Total operating expenses		7,023			1,692			9,448			4,598
Operating loss		(7,022	)		(1,659	)		(9,285	)		(4,516	)
Other (expenses) income
Interest expense		(901	)		(492	)		(1,591	)		(2,084	)
Change in fair value of derivative and other fair valued instruments, net		(4,173	)		1,258			(6,835	)		4,836
Other income (expense)		-			-			6			(62	)
Total other (expense) income		(5,074	)		766			(8,420	)		2,690
Loss before income taxes		(12,096	)		(893	)		(17,705	)		(1,826	)
Income tax benefit		-			-			-			-
Net loss	$	(12,096	)	$	(893	)	$	(17,705	)	$	(1,826	)
Net loss per common share -
Basic and diluted	$	(0.09	)	$	(173,963	)	$	(0.39	)	$	(727,690	)
Weighted average common shares outstanding -
Basic and diluted		133,772			0.0051			45,150			0.0025

TABLE OF CONTENTS

The accompanying notes are an integral part of these condensed consolidated financial statements.

Consolidated Balance Sheets		2
Consolidated Statements of Operations		3
Consolidated Statement of Changes in Stockholders’ Deficit		4
Consolidated Statements of Cash Flows		5
Condensed Notes to the Consolidated Financial Statements		6-20

VERITEQ CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	June 30,			December 31,
	2016			2015
	(UNAUDITED)
ASSETS

CURRENT ASSETS:
Cash	$	58,103		$	69,169
Accounts Receivable		116,483			20,790
Inventories		242,590			301,883
Other Current Assets		1,084			-

Total Current Assets		418,260			391,842

Property and Equipment, net		11,558			13,468
Office Building and Building Improvements, net		876,334			888,846

Total Assets	$	1,306,152		$	1,294,156

LIABILITIES AND STOCKHOLDERS' DEFICIT

CURRENT LIABILITIES:
Accounts Payable	$	2,326,675		$	1,526,309
Accrued Expenses		1,991,638			31,672
Sales Returns Reserve		44,576			33,945
Mortgage Notes Payable, current portion		32,697			32,654
Line of Credit		331,653			349,000
Notes Payable, net of debt discount of $483,255 and $33,071, including premium of $106,667 and $0 respectively, current portion (related party $250,000 and $125,000, respectively)		4,827,607			341,251
Subordinated debt with an embedded conversion option, at fair value		263,138			-
Warrant liabilities at fair value		1,582,440			-
Related Parties Loans Payable		121,500			121,500
Guarantee Liabilities		-			147,058
Liabilities for conversion options of convertible notes		3,820,705			-
Total Current Liabilities		15,342,629			2,583,389

Mortgage Notes Payable, net of current portion and discounts		735,116			750,988
Convertible Notes Payable, including premium of $53,333 and $0 respectively		133,333			-

Total Liabilities		16,211,078			3,334,377

Commitments and Contingencies (Note 10)

Series D preferred stock ($0.01 par value; 1,400 shares outstanding)		1,400,000			-

Stockholders' deficit:
Preferred stock ($0.01 par value; 5 million shares authorized; Series E preferred stock, 1,000 designated, 888 and 849 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively		9			9
Common stock ($0.00001 par value; 100 million shares authorized; 965,635 and 0 shares issued and outstanding)		10			-
Additional paid-in capital		(16,404,799	)		(9	)
Retained earnings (Accumulated deficit)		99,854			(2,040,221	)
Total stockholders' deficit		(16,304,926	)		(2,040,221	)

Total liabilities and stockholders' deficit	$	1,306,152		$	1,294,156

See accompanying condensed notes to unaudited consolidated financial statements.

VERITEQ CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2016			2015			2016			2015


REVENUES:
Retail sales	$	1,801,375		$	1,674,505		$	3,484,999		$	3,373,257

Total Revenue		1,801,375			1,674,505			3,484,999			3,373,257

COST OF RETAIL SALES:		1,191,470			1,081,849			2,271,406			2,186,229

GROSS PROFIT		609,905			592,656			1,213,593			1,187,028

OPERATING EXPENSES:
General and administrative expenses		197,251			54,481			336,035			117,289
Marketing and promotion		305,633			338,517			653,504			684,211
Payroll expenses		237,206			232,146			468,745			405,922
Credit card processing		71,644			68,600			129,328			129,391

Total Operating Expenses		811,734			693,744			1,587,612			1,336,813

LOSS FROM OPERATIONS		(201,829	)		(101,088	)		(374,019	)		(149,785	)

OTHER INCOME (EXPENSES):
Other Income (Expense)		303,080			-			156,021			-
Sublease Income		5,508			2,125			11,370			3,250
Change in fair value of derivative and other fair valued instruments, net		158,108			-			158,108			-
Interest Expense		(181,832	)		(12,807	)		(387,387	)		(25,135	)

Total Other Income (Expense)		284,864			(10,682	)		(61,888	)		(21,885	)

NET INCOME (LOSS)	$	83,035		$	(111,770	)	$	(435,907	)	$	(171,670	)

NET INCOME (LOSS) PER COMMON SHARE:
Basic	$	0.09		$	0		$	(0.50	)	$	0
Diluted	$	-		$	0		$	(0.50	)	$	0

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic		965,635			0			864,057			0
Diluted		1,713,307,950			0			864,057			0

See accompanying condensed notes to unaudited consolidated financial statements.

VERITEQ CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT

For the six months ended June 30, 2016

	Preferred Stock Series E				Common Stock				Additional Paid-in			Retained Earnings (Accumulated			Total Stockholders'
	Number		Amount		Number		Amount		Capital			Deficit)			Deficit

Balance at December 31, 2015		849		9		-		-		(9	)		(2,040,221	)		(2,040,221	)

Recapitalization		39		-		965,635		10		(13,828,808	)		-			(13,828,798	)

Reorganization reclassification		-		-		-		-		(2,575,982	)		2,575,982			-

Net Loss for the six months ended June 30, 2016		-		-		-		-		-			(435,907	)		(435,907	)

Balance at June 30, 2016 (unaudited)		888		9		965,635		10		(16,404,799	)		99,854			(16,304,926	)

See accompanying condensed notes to unaudited consolidated financial statements.

VERITEQ CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Condensed Consolidated Statement of Changes in Stockholders’ Deficit

	For the Six Months Ended June 30,
	2016			2015

CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss	$	(435,907	)	$	(171,670	)
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:
Depreciation		14,422			15,140
Amortization of Deferred Loan Costs		-			5,895
Amortization of Debt Discount		89,190			-
Change in fair value of derivatives and other fair value instruments		(158,110	)		-
Accretion of Premium on Convertible Note Payable		160,000			-
Gain on Extinguishment of Debt		(8,963	)		-
Changes in Operating Assets and Liabilities:
Inventory		59,293			(45,651	)
Accounts Receivable		(95,693	)		39,580
Other Current Assets		(1,038	)		(83,549	)
Accounts Payable		103,990			20,709
Sales Returns Reserve		10,631			(44,272	)
Accrued Expenses		104,378			(36,742	)
Guarantee Liabilities		(147,058	)		-

Net Cash Used in Operating Activities		(304,865	)		(300,560	)

CASH FLOWS FROM INVESTING ACTIVITIES:
Preacquisition loan to Veriteq		(37,000	)		-

Net Cash Used in Investing Activities		(37,000	)		-

CASH FLOWS FROM FINANCING ACTIVITIES:
Bank overdraft		-			31,263
Repayments of Line of Credit		(17,347	)		65,000
Proceeds from Note Payable		-			300,000
Proceeds from Convertible Notes Payable		621,293			-
Repayment of Notes Payable		(256,971	)		(85,604	)
Proceeds from Related Party Loans		-			-
Repayment of Mortgage Notes		(16,176	)		(15,660	)

Net Cash Provided by Financing Activities		330,799			294,999

Net Increase (Decrease) in Cash		(11,066	)		(5,561	)

Cash - Beginning of Period		69,169			5,561

Cash - End of Period	$	58,103		$	-

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

Cash paid during the year for:
Interest	$	16,955		$	12,328
Income Taxes	$	-		$	-

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

Net liabilities and Redeemable Preferred Stock assumed in recapitalization	$	13,828,799		$	-

Debt Discount Recorded on Notes Payable and Warrants	$	362,810		$	24,000
Reclassification of accumulated deficit to additional paid in capital	$	2,575,982		$	-

~~For~~See ~~the~~accompanying ~~Nine~~condensed ~~Months~~notes ~~Ended~~to ~~September~~unaudited ~~30,~~consolidated ~~2015~~financial statements.

(in thousands)

	Preferred Stock			Common Stock				Additional Paid-in		Accumulated			Total Stockholders'
	Number		Amount	Number		Amount		Capital		Deficit			Deficit
Balance at December 31, 2014	-	$	-	*	$	-	$	15,000	$	(23,734	)	$	(8,734	)
Net loss	-		-	-		-		-		(17,705	)		(17,705	)
Issuance of common stock for partial conversion of notes payable and accrued interest	-		-	488		-		658		-			658
Sale of common stock to related parties				1				20					20
Stock options issued to employees								5,346		-			5,346
Issuance of restricted stock to officers and directors				250,000		3		871		-			874
Settlement of liabilities with related party				11				32		-			32
Issuance of common stock for cashless exercise of warrants	-		-	224		-		11		-			11
Reclassification of conversion option liabilities upon conversion of notes payable	-		-	-		-		168		-			168
Balance at September 30, 2015 (unaudited)	-		-	250,724		3		22,106		(41,439	)		(19,330	)

* At December 31, 2014 the Company had 30 shares (unrounded) outstanding after giving retroactive effect to the reverse splits of 1:1,000 on February 11, 2015 and 1:10,000 on July 29, 2015

The accompanying notes are an integral part of these condensed consolidated financial statements.

VERITEQ CORPORATION AND SUBSIDIARIES

~~Condensed~~CONDENSED NOTES ~~Consolidated~~TO ~~Statements~~CONSOLIDATED ofFINANCIAL ~~Cash Flows (unaudited)~~STATEMENTS

~~(in thousands)~~ JUNE 30, 2016

	For the Nine Months Ended September 30,
	2015			2014
Cash flows from operating activities:
Net loss	$	(17,705	)	$	(1,826	)
Adjustments to reconcile net loss to net cash used in operating activites:
Stock-based compensation		6,220			565
Deprecation and amortization		122			448
Non-cash interest charges		1,328			2,004
Asset impairment charge		380			-
Issuance of common stock for services		-			337
Change in fair value of subordinated convertible debt		174			(2,726	)
Change in fair value of conversion options embedded in convertible notes		5,098			(3,404	)
Change in fair value of warrants		1,563			1,294
Gain on extinguishment of debt		(9	)		-
Loss on disposal of fixed assets		4			-
Loss on settlement of other receivable		-			56
Increase (decrease) in cash attributable to changes in operating assets and liabilities:
Accounts payable and accrued expenses		1,804			1,213
Other receivable		-			115
Other current assets		28			47
Accounts receivable		11			(24	)
Other assets		-			(37	)
Net cash used in operating activities		(982	)		(1,938	)
Cash flows from investing activities:
Purchases of property and equipment		(1	)		(20	)
Net cash used in investing activities		(1	)		(20	)
Cash flows from financing activities:
Proceeds from the issuance of convertible notes payable and warrants		984			1,354
Proceeds from the issuance of related party notes and advances		137			235
Repayment of convertible notes		(95	)		(400	)
Repayment of related party notes and advances		(137	)		(90	)
Proceeds from the issuance of common stock to related parties		20			-
Decrease in restricted cash		-			870
Net cash provided by financing activities		909			1,969
Net (decrease) increase in cash		(74	)		11
Cash and cash equivalents - beginning of period		77			13
Cash and cash equivalents - end of period	$	3		$	24

(Unaudited)

~~The~~NOTE ~~accompanying~~1 ~~notes~~– ~~are~~ORGANIZATION, anBASIS ~~integral~~OF ~~part~~PRESENTATION ofAND ~~these~~SUMMARY ~~condensed~~OF ~~consolidated~~SIGNIFICANT ~~financial~~ACCOUNTING ~~statements.~~ POLICIES

Organization

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 Company 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 (“Brace Shop”) are under common control and Brace Shop Real Estate Holdings, LLC is considered a variable interest entity for the purpose of the consolidated financial statements.

On November 25, 2015, Brace Shop LLC, a Florida limited liability company entered into a Stock Purchase Agreement (the “Purchase Agreement”) with Veriteq Corporation (“Veriteq”) whereby Veriteq agreed to acquire (the “Acquisition”), all of the issued and outstanding membership interests (the “Stock”) of Brace Shop.

The acquisition of Brace Shop was completed on May 6, 2016 (“closing date”), at which time Brace Shop became a wholly owned subsidiary of Veriteq. The combined companies is hereafter referred to as “the Company.” The reverse acquisition is being accounted for as a recapitalization of Brace Shop. Brace Shop is deemed to be the acquirer in the reverse acquisition. Consequently, the assets and liabilities and the historical operations that are reflected in the consolidated financial statements prior to the reverse acquisition are 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 acquisition 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 acquisition. On the closing date the Company assumed $13,828,808 of net liabilities and was deemed to have issued 39 Series E preferred shares and 965,635 common shares to the shareholders of Veriteq. In addition, the Company assumed options for 123,500,000 shares of common stock and assumed warrants which are treated as liabilities included in the $13,828,808 of net liabilities above (see note 14, Warrants Deemed as Liabilities). Pursuant to the terms of the Purchase Agreement, Veriteq paid (i) $250,000 in cash to Mrs. Lynne Shapiro, the sole member of Brace Shop, (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, the former CEO of Veriteq 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 following table presents the liabilities and redeemable preferred stock assumed in the reverse acquisition:

Accounts payable	$	696,376
Accrued expenses		808,474
Interest payable		1,047,115
Liability for Conversion Option		3,841,921
Notes payable, net of discounts		4,309,333
Warrant liability		1,439,130
Subordinated note, at fair value		249,495
Series D Preferred Stock		1,400,000
Other		36,964
	$	13,828,808

VERITEQ CORPORATION AND SUBSIDIARIES

~~Notes~~CONDENSED toNOTES TO ~~Condensed~~CONSOLIDATED ~~Consolidated~~FINANCIAL ~~Financial Statements (unaudited)~~STATEMENTS

~~September~~ JUNE 30, ~~2015~~2016

~~1. ORGANIZATION, BASIS OF PRESENTATION AND SUMMARY OF SELECTED SIGNIFICANT ACCOUNTING POLICIES~~ (Unaudited)

~~Organization~~On ~~and~~May ~~Basis~~6, 2016 as part of ~~Presentation~~the recapitalization the Company applied paragraph 505-10-S99-3 of the FASB Accounting Standards Codification (Topic 4B of the Staff Accounting Bulletins (“SAB”) (“SAB Topic 4B”) issued by the US Securities Exchange Commission (the “SEC”), by reclassifying the accumulated member’s deficit of, Brace Shop, LLC, of $2,575,902 to additional paid-in-capital.

~~These~~The ~~unaudited~~Purchase ~~condensed~~Agreement ~~consolidated~~contemplates ~~financial~~that ~~statements~~all interest, principal and ~~notes~~any ~~thereto~~other ~~include~~required ~~the~~payments ~~financial~~on ~~statements~~all debt instruments of ~~VeriTeQ~~the ~~Corporation~~Veriteq ~~(“VC”),~~that aare ~~Delaware~~outstanding ~~corporation, and~~as ~~its~~of ~~wholly-owned~~the ~~subsidiary,~~date ~~VeriTeQ~~of ~~Acquisition~~the ~~Corporation~~Purchase Agreement (~~“VAC”~~but excluding the Acquisition Notes), shall only be paid through athe ~~Florida~~issuance ~~corporation~~of shares of common stock. VCAll options, ~~VAC~~warrants, shares of preferred stock and ~~VAC’s~~other ~~inactive~~securities ~~VTQ~~of IPthe ~~Holding~~Company ~~Corporation~~outstanding as ~~and~~of ~~PositiveID~~the ~~Animal~~date ~~Health~~of ~~Corporation~~the ~~subsidiaries are~~Purchase ~~referred~~Agreement are to ~~together~~remain asin ~~“VeriTeQ”~~place oron “the ~~Company.”~~terms ~~The~~set ~~Company’s~~forth ~~business~~in ~~was~~each ~~comprised~~ of such securities, except that ~~ongoing~~all ~~efforts~~options, warrants and shares of preferred stock are to ~~provide~~be ~~implantable~~converted ~~medical~~into ~~device~~common ~~identification~~stock within six months of the date of closing of the Acquisition.

~~The~~Basis accompanying unaudited condensed consolidated financial statements and 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, 2014. These condensed consolidated 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 consolidated interim financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). All intercompany balances and transactions have been eliminated in consolidation. In the opinion of the Company’s management, all adjustments (consisting of normal recurring adjustments) considered necessary for the fair presentation of the condensed consolidated interim financial statements have been made. Results of operations reported for interim periods may not be indicative of the results for the entire year.Presentation

InInterim ~~addition,~~Financial certain prior year balances have been reclassified to conform to the current presentation. Specifically, the Change in fair value of convertible debt with embedded option feature, Change in fair value of conversion option of the convertible notes and Change in fair value of warrant liabilities for the three and nine months ended September 30, 2014, which had been reflected as separate line items in the consolidated statements of operations, are now reflected in Change in fair value of derivative and other fair valued instruments in the accompanying consolidated statements of operations.Statements

~~Going~~The ~~Concern~~accompanying unaudited consolidated financial statements and condensed notes thereto should be read in conjunction with the audited consolidated financial statements of Brace Shop, LLC included in the Company’s Current Report on Form 8-K for the fiscal years ended December 31, 2015 and 2014 which was filed on May 11, 2016. 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.

~~The~~Principles ~~accompanying consolidated 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 since its inception on December 14, 2011 and had a working capital deficit and accumulated deficit at September 30, 2015 of $16.0 million and $41.4 million, respectively. The Company’s cash position is critically deficient, and payments essential to the Company’s ability to operate are not being made in the ordinary course of business. Failure to raise capital in the coming days to fund the Company’s operations and failure to generate positive cash flow to fund such operations in the future will have a material adverse effect on the Company’s financial condition. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated 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. The auditor’s report on the Company’s financial statements for the years ended December 31, 2014 and 2013 expressed substantial doubt about the Company’s ability to continue as a going concern.Consolidation

The ~~Company~~unaudited ~~needs~~consolidated tofinancial ~~raise~~statements ~~additional~~include ~~funds~~the ~~immediately~~accounts ~~and~~of ~~continue~~the toVeriteq ~~raise~~Corp. ~~funds~~and ~~until~~its ittwo ~~begins~~subsidiary’s toBrace ~~generate sufficient cash from operations~~Shop, LLC and itBraceshop ~~may~~Real ~~not~~Estate ~~be able to obtain the necessary financing on acceptable terms~~Holdings, ~~or at all~~LLC. ~~During~~In the ~~nine~~preparation ~~months~~of ~~ended September~~unaudited ~~30,~~consolidated ~~2015,~~financial ~~the~~statements ~~Company raised approximately $0.9 million, net~~ of ~~repayments, from~~ the ~~sale~~Company, intercompany oftransactions ~~convertible~~and ~~promissory notes~~balances ~~(see~~are ~~note 4)~~eliminated.

On October 19, 2015, the Company received a default notice from its senior lender demanding repayment of approximately $2.1 million of indebtedness, secured by substantially all of the Company’s assets, which the Company was unable to repay. The ~~Company~~ ~~also~~accompanying ~~received~~unaudited aconsolidated ~~Notice~~financial ofstatements ~~Disposition~~have ofbeen ~~Collateral~~prepared ~~advising~~in ~~the~~accordance ~~Company~~with ~~that~~generally ~~the~~accepted ~~senior~~accounting ~~lender, acting as collateral agent, intended~~principles toin ~~sell~~ the ~~assets~~United atStates ~~auction. On November 4, 2015, the Company’s assets were sold at auction for the sum~~ of $1America ~~million, which was credited against the Company’s outstanding senior debt~~ (~~see~~“US ~~note 12~~GAAP”).

~~As of the date of this report, the~~Summary ~~Company has ceased its business operations. The Company currently intends to attempt to acquire, merge or combine with and/or acquire the operating assets~~ of anSignificant ~~operating~~Accounting ~~business (see note 12).~~Policies

Use of Estimates

In preparing the unaudited 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 unaudited 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, fair value of guarantees, assumptions used in valuation models used in estimating the fair values of certain promissory notes, warrants, embedded conversion options, stock-based compensation and determining valuation allowance for deferred assets.

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 June 30, 2016 the Company did not have any balances that exceeded the federally insured limits.

VERITEQ CORPORATION AND SUBSIDIARIES

~~Notes~~CONDENSED toNOTES TO ~~Condensed~~CONSOLIDATED ~~Consolidated~~FINANCIAL ~~Financial Statements (unaudited)~~STATEMENTS

~~September~~ JUNE 30, ~~2015~~2016

~~Reverse Stock Splits and Change in Par Value of Common Stock~~(Unaudited)

OnAccounts December 18, 2014, an amendment to the Company’s Amended and Restated Certificate of Incorporation to effect a reverse split of all of the outstanding shares of the Company’s common stock at a ratio of 1 for 1,000 was approved by the Company’s Stockholders. The Certificate of Amendment became effective on February 11, 2015, and at that time each 1,000 shares of outstanding common stock of the Company was combined and automatically converted into one share of the Company’s common stock, with a par value of $0.00001 per share (the “February 2015 Reverse Stock Split”). In addition, the conversion and exercise prices of all of the Company’s outstanding preferred stock, common stock purchase warrants, stock options and convertible notes payable were proportionately adjusted at the 1:1,000 reverse split ratio consistent with the terms of such instruments. No fractional shares were issued as a result of the February 2015 Reverse Stock Split, and shareholders received a cash payment in lieu of such fractional shares that they would otherwise be entitled.Receivable

~~Also~~The Company extends thirty-day credit terms to certain customers based on ~~December~~credit 18worthiness of medical supply companies, ~~2014~~hospitals, military, ~~the~~government ~~Company’s~~institutions ~~stockholders~~and ~~approved~~schools. anManagement ~~amendment~~reviews toany ~~the~~account ~~Company’s~~receivable ~~Amended~~balances ~~and~~over ~~Restated~~thirty ~~Certificate~~days. Account balances ofthat ~~Incorporation~~are deemed to ~~(i)~~be ~~reduce~~uncollectible are charged to the ~~par~~bad ~~value~~debt expense after all means of collection have been exhausted and the ~~Company’s~~potential ~~common~~for ~~stock~~recovery ~~from~~is $0considered remote.01 ~~per~~The ~~share~~accounts toreceivable ~~$0.00001~~balance ~~per~~is ~~share;~~comprised ~~and~~mostly of internet sales due to ~~(ii)~~merchant ~~increase~~account timing differences. During the ~~number~~six ofmonths ~~shares~~ended ofJune ~~common~~30, ~~stock~~2016 ~~that~~and 2015, the Company isrecognized ~~authorized~~$0 of expenses related to ~~issue~~uncollectible ~~from~~accounts ~~500~~receivable ~~million~~and tomanagement 10has ~~billion.~~determined ~~This amendment~~that ~~became~~an ~~effective~~allowance onwas not necessary at June 30, 2016 and December 1831, ~~2014~~2015.

On July 29, 2015, another amendment to the Company’s Amended and Restated Certificate of Incorporation became effective to implement a 1-for-10,000 reverse stock split (the “July 2015 Reverse Stock Split”) of the Company’s common stock. As a result, each 10,000 shares of the Company’s issued and outstanding common stock automatically, and without any action on the part of the respective holders, were combined and converted into one issued and outstanding share of common stock. The July 2015 Reverse Stock Split resulted in a reduction in the number of issued and outstanding shares of the Company’s common stock from approximately 4.4 billion to approximately 446,000. The July 2015 Reverse Stock Split affected all issued and outstanding shares of the Company's common stock, as well as all common stock underlying convertible notes, warrants, convertible preferred stock and stock options outstanding immediately prior to the July 2015 Reverse Stock Split. The amendment also increased the number of shares of common stock that the Company is authorized to issue from 10 billion to 100 billion. The Amendment was approved by the Company’s Board of Directors and ratified by the Company’s stockholders on May 26, 2015.Inventories

~~All share~~Inventories, consisting ~~per share and capital stock amounts as~~ of ~~September~~finished ~~30,~~goods ~~2015~~are ~~and~~stated ~~December~~at ~~31, 2014, and for~~ the ~~three~~lower ~~and~~of ~~nine~~cost ~~months ended September 30, 2015~~ and ~~2014~~net ~~have~~realizable ~~been~~value ~~retroactively~~utilizing ~~restated to give effect to~~ the ~~July 2015 Reverse Stock Split~~first-in, ~~the~~first-out ~~February 2015 Reverse Stock Split and the change in the par value of the Company’s common stock~~method.

~~Use~~Property ofand ~~Estimates~~ Equipment and Building and Building Improvements

~~The~~Property ~~preparation~~and ofequipment ~~consolidated~~and ~~financial~~building ~~statements~~and inbuilding ~~conformity~~improvements ~~with~~are ~~U.S.~~carried ~~GAAP~~at ~~requires~~cost. ~~management~~The tocost ~~make~~of ~~estimates~~repairs and ~~assumptions that~~maintenance ~~affect~~is ~~the~~expensed ~~reported~~as ~~amounts~~incurred. When of assets ~~and~~are ~~liabilities~~retired ~~and~~or ~~disclosure~~disposed of, ~~contingent~~the ~~assets~~cost and ~~liabilities~~accumulated atdepreciation are removed from the ~~date~~accounts, ofand any resulting ~~the~~gains ~~consolidated~~or ~~financial~~losses ~~statements~~are ~~and~~included ~~the~~in ~~reported~~income ~~amounts~~in the year of ~~revenues~~disposition. ~~and~~The ~~expenses~~Company ~~during~~examines the ~~year.~~possibility ~~Actual~~of ~~results~~decreases ~~could~~in the value beof ~~affected~~fixed byassets ~~those~~when ~~estimates.~~events ~~Included~~or changes in ~~these~~circumstances ~~estimates~~reflect ~~are~~the ~~assumptions~~fact ~~used~~that intheir ~~determining~~recorded ~~the~~value ~~lives~~may ~~and~~not ~~valuation~~be ofrecoverable. ~~long-lived~~Depreciation ~~assets,~~is incalculated ~~valuation~~on ~~models~~a ~~used~~straight-line inbasis ~~estimating~~over the ~~fair~~estimated ~~value~~useful life of ~~certain~~the ~~promissory~~assets. ~~notes,~~Building ~~warrants,~~improvements ~~embedded~~are ~~conversion~~amortized ~~options,~~on a ~~stock~~straight-~~based~~line ~~compensation~~basis ~~and~~over inthe ~~determining~~building ~~valuation~~depreciable ~~allowances for deferred tax assets~~period.

~~Property~~Internal ~~and~~Use ~~Equipment~~Software

~~Property~~Costs ~~and~~incurred ~~equipment~~to ~~consists~~develop ~~primarily~~internal-use ofsoftware ~~machinery~~during ~~and~~the ~~computer~~preliminary ~~equipment~~project ~~and~~stage isare ~~stated~~expensed atas ~~cost~~incurred. ~~less~~Internal-use ~~accumulated~~software development ~~depreciation.~~costs ~~Depreciation expense~~are capitalized during the application development stage, which is ~~computed~~after: ~~using~~(i) the ~~straight-line~~preliminary ~~method~~project ~~over~~stage is ~~the~~completed; ~~estimated~~and ~~useful~~(ii) ~~life~~management ofauthorizes and commits to funding the ~~related~~project ~~assets,~~and ~~generally~~it ~~ranging~~is ~~from~~probable the project will be completed 3and used to 10perform ~~years~~the function intended. ~~Depreciation~~Capitalization ~~expense~~ceases ~~for~~at the ~~three~~point ~~and~~the ~~nine~~software ~~months~~project ~~ended~~is ~~September~~substantially ~~30,~~complete ~~2015~~and ready ~~was~~for ~~approximately~~its $2intended use,~~000~~ and ~~$6,000,~~after all substantial testing is completed. Upgrades and enhancements are capitalized if it is ~~respectively~~probable that those expenditures will result in additional functionality. ~~Depreciation~~Amortization is provided for on a straight-line basis over the ~~three~~expected ~~and~~useful ~~nine~~life ~~months~~of ~~ended~~five ~~September~~years ~~30,~~of ~~2014~~the ~~was~~internal-use ~~approximately~~software ~~$1,000~~development costs and $2related upgrades and enhancements. When existing software is replaced with new software,~~000,~~ ~~respectively~~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 six months ended June 30, 2016 and 2015 the Company recorded no impairment charges.

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.

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 collectibility 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.

VERITEQ CORPORATION AND SUBSIDIARIES

~~Notes~~CONDENSED toNOTES TO ~~Condensed~~CONSOLIDATED ~~Consolidated~~FINANCIAL ~~Financial Statements (unaudited)~~STATEMENTS

~~September~~ JUNE 30, ~~2015~~2016

~~Intangible Assets~~ (Unaudited)

~~The~~Cost ~~Company’s intangible assets (see note 2) are amortized on a straight-line basis over their expected economic lives ranging from 7 to 14 years. The lives were determined based upon the expected use~~ of ~~the~~Retail asset, the ability to extend or renew patents, trademarks and other contractual provisions associated with the asset, the stability of the industry, expected changes in and replacement value of distribution networks and other factors deemed appropriate. The Company reviews its intangible assets and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. If an impairment indicator is present, the Company evaluates recoverability by a comparison of the carrying amount of the assets to future undiscounted net cash flows expected to be generated by the assets. If the carrying value of the asset exceeds the projected undiscounted cash flows, the Company is required to estimate the fair value of the asset and recognize an impairment charge to the extent that the carrying value of the asset exceeds its estimated fair value. The Company recorded an impairment charge of $0.4 million for the three and nine months ended September 30, 2015 and did not record any impairment charges during the three and nine months ended September 30, 2014.Sales

~~Revenue~~Cost ~~Recognition~~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.

~~Product~~Marketing ~~revenue is recognized at the time product is shipped~~ and title has transferred, provided that a purchase order has been received or a contract has been executed, there are no uncertainties regarding customer acceptance, the sales price is fixed and determinable and collectability is deemed probable. Cost of products sold is recorded as the related revenue is recognized.Promotion

~~Income~~Marketing ~~Taxes~~ and promotion is expensed as incurred. Marketing and promotion expenses for the six months ended June 30, 2016 and 2015 were $653,504 and $684,211, respectively.

~~The~~Shipping Company recognizes deferred tax liabilities and assets based on the temporary differences between the financial statement and tax bases of assets and liabilities that will result in future taxable or deductible amounts, based on enacted tax laws and rates in effect for the year in which the differences are expected to affect taxable income. Temporary differences between taxable income reported for financial reporting purposes and income tax purposes consist primarily of timing differences such as amortization of intangible assets, deferred officers' compensation and stock-based compensation. A valuation allowance is provided against net deferred tax assets when the Company determines it is more likely than not that it will fail to generate sufficient taxable income to be able to realize the deferred tax assets.Costs

InShipping ~~accordance~~costs ~~with~~are ~~U.S.~~included ~~GAAP,~~in ~~the~~cost ~~Company is required to determine whether a tax position~~ of ~~the~~retail ~~Company~~sales isand ~~more~~totaled ~~likely than not to be sustained upon examination by the applicable taxing authority~~$399,970 ~~including~~and ~~resolution of any related appeals or litigation processes~~$392,171 ~~based~~for on the ~~technical~~six ~~merits~~months ofJune the position. The tax benefit to be recognized is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. Derecognition of a tax benefit previously recognized could result in the Company recording a tax liability that would reduce net assets. Based on its analysis, the Company has determined that it has not incurred any liability for unrecognized tax benefits as of September 30, ~~2015~~2016 and ~~December 31~~2015, ~~2014~~ respectively.

~~Concentration~~Derivative Financial Instruments

~~All~~The Company accounts for notes payable that are convertible into shares of the Company’s ~~revenue~~common stock and ~~accounts~~warrants ~~receivable~~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 ~~from~~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 ~~single~~Monte ~~customer~~Carlo simulation model. Unobservable inputs that, ~~Establishment~~if ~~Labs~~changed, might SAproduce 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~~Stock-Based ~~per~~Compensation ~~Common Share and Common Share Equivalent~~

~~Basic~~Stock-based ~~loss~~compensation ~~per~~awards ~~share excludes dilution and is computed by dividing income available~~ to ~~common~~employees ~~stockholders~~are bymeasured ~~the~~at ~~weighted-average~~fair ~~number of~~value ~~common~~on ~~shares outstanding during~~ the ~~period.~~grant ~~Diluted~~date ~~loss~~and ~~per~~compensation ~~share~~cost ~~reflects~~is ~~the~~recognized ~~potential~~on ~~dilution~~a ~~that could occur if securities~~straight orline ~~other~~basis ~~contracts~~over ~~to issue common stock were exercised or converted into common stock or resulted in~~ the ~~issuance~~requisite ofservice ~~common~~period ~~stock that then shared in the income~~ of ~~the~~each ~~Company~~award. ~~The~~Stock-based ~~following~~compensation ~~securities~~awards ~~were~~to ~~excluded~~nonemployees inare ~~the~~measured ~~computation~~and ofexpensed at ~~dilutive~~fair ~~loss~~value ~~per share~~at ~~for~~ the ~~nine~~date ~~months~~services ~~ended~~are ~~September 30, 2015 and 2014 because their inclusion would have been anti-dilutive:~~rendered.

	2015		2014
Stock options		148,500,000		-
Warrants		67,180,577		109
Shares issuable upon conversion of preferred stock		46,964,286		-
Shares issuable upon conversion of convertible notes payable		150,713,794		76
		413,358,657		185

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 AND SUBSIDIARIES

~~Notes~~CONDENSED toNOTES TO ~~Condensed~~CONSOLIDATED ~~Consolidated~~FINANCIAL ~~Financial Statements (unaudited)~~STATEMENTS

~~September~~ JUNE 30, ~~2015~~2016

~~Impact of Recently Issued Accounting Standards~~ (Unaudited)

~~From~~The ~~time~~following tostock ~~time,~~options ~~the~~and ~~Financial~~warrants ~~Accounting~~and ~~Standards~~shares ~~Board~~issuable ~~(the~~upon ~~“FASB”)~~conversion orof ~~other~~convertible ~~standards~~notes ~~setting~~payable ~~bodies~~outstanding ~~will~~at ~~issue~~June ~~new~~30, ~~accounting~~2016 ~~pronouncements.~~and ~~Updates~~2015 towere not included in the ~~FASB~~computation ~~Accounting~~of ~~Standards~~dilutive ~~Codification~~loss ~~(“ASC”)~~per ~~are~~share ~~communicated~~except ~~through issuance~~for ofthe anthree ~~Accounting~~months ~~Standards~~ended ~~Update~~June 30, 2016 (~~“ASU”~~see below). because the net effect would have been anti-dilutive:

2. INTANGIBLE ASSETS

	June 30,		June 30,
	2016		2015
Stock options		123,500,000		-
Warrants		30,102,859		-
Shares issuable upon conversion of Series D preferred stock		15,090,164		-
Shares issuable upon conversion of convertible notes payable		75,036,022		-
Shares issuable upon conversion of subordinated note		21,986,279		-
Shares issuable upon conversion of Series E preferred stock		1,501,831,980
Shares issuable to a consultant		69,442		-
		1,767,616,746		-

~~Intangible~~The ~~assets~~following ~~consist~~table ofsets forth the ~~following~~computation of basic and diluted EPS:

	September 30, 2015							December 31, 2014
	For the Three Months Ended
	Gross Carrying		Accumulated					Gross Carrying		Accumulated
	June 30, 2016
($000's)	Amount		Amortization			Total		Amount		Amortization			Total
Numerator:
Proprietary Technology	$	1,372	$	(399	)	$	973	$	1,500	$	(318	)	$	1,182
Net income	$	83,035
Customer relationship		248		(248	)		-		500		(212	)		288
Preferred dividends		-
	$	1,620	$	(647	)	$	973	$	2,000	$	(530	)	$	1,470
Numerator for basic EPS - income available to common stockholders		83,035
Effect of dilutive securities:
Interest expense		197,590
Numerator for diluted EPS - income available to common stockholders after assumed conversions		280,625
Denominator:
Denominator for basic EPS - weighted average shares		965,635
Effect of dilutive securities:
Options outstanding		91,619,712
Convertible promissory notes and subordinated note		66,618,155
Subordinated note		21,986,279
Warrants		21,426,793
Series D Preferred		8,789,954
Series E Preferred		1,501,831,980
Shares issuable to a consultant		69,442
Dilutive potential common shares		1,712,342,315
Denominator for diluted EPS - adjusted weighted average shares and assumed conversions		1,713,307,950
Basic EPS	$	0.09
Diluted EPS	$	-

AsIncome of September 30, 2015, the Company determined that its customer relationship intangible asset was fully impaired, and that the fair value of its proprietary technology was $1.0 million (see note 12). As a result, the Company recognized impairment charges aggregating to $0.4 million to write these assets down to their fair values. Amortization of intangibles charged against income amounted to $27,000 and $0.1 million for the three-months ended September 30, 2015 and 2014, respectively, and $0.1 million and $0.4 million for the nine months ended September 30, 2015 and 2014, respectively.Taxes

3Prior to May 6, 2016 Brace Shop, LLC and Braceshop Real Estate Holdings, LLC were single member Limited Liability Companies (LLC) and as such were disregarded entities for federal income tax purposes. Accordingly, all income was reported on the member’s ~~ACCRUED~~personal ~~EXPENSES~~income tax return and no provisions for income taxes were reported in the Brace Shop, LLC’s consolidated financial statements.

~~The~~Starting ~~following~~on ~~table~~May ~~summarizes~~6, 2016, income taxes are accounted for under the ~~significant~~asset ~~components~~and ofliability ~~accrued~~method ~~expenses~~as prescribed by ASC Topic 740: Income Taxes (“ASC 740”), except for Braceshop Real Estate Holdings, LLC which as a VIE remains owned by an individual member and therefore as a disregarded entity is taxed on the member’s personal income tax return. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities, and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance, when in the Company's opinion it is likely that some portion or the entire deferred tax asset will not be realized.

	September 30, 2015		December 31, 2014
	(in thousands)
Accrued payroll and payroll related (including $1,217 and $1,060 to related parties)	$	1,608	$	1,204
Accrued legal		466		477
Accrued other expenses (including $124 and $111 to related parties)		1,147		830
Total accrued expenses	$	3,221	$	2,511

During the nine months ended September 30, 2015, the Company entered into separate agreements with Scott Silverman, the Company’s Chief Executive Officer, Randolph Geissler, the Company’s President, Michael Krawitz, the Company’s Chief Legal and Financial Officer and one other executive officer, (collectively, the “Executive Officers”) whereby each Executive Officer agreed that certain amounts of accrued but unpaid compensation that each individual was entitled to receive (aggregating approximately $914,000) would be paid in the form of a convertible promissory note (the “Officer Notes”). In connection with these agreements, the Company issued Officer Notes to Messrs. Silverman, Geissler, Krawitz and the other executive officer in the principal amounts of $194,010, $285,000, $384,509 and $50,000, respectively.

VERITEQ CORPORATION AND SUBSIDIARIES

~~Notes~~CONDENSED toNOTES TO ~~Condensed~~CONSOLIDATED ~~Consolidated~~FINANCIAL ~~Financial Statements (unaudited)~~STATEMENTS

~~September~~ JUNE 30, ~~2015~~2016

~~4. NOTES PAYABLE~~(Unaudited)

~~Notes~~Pursuant ~~payable~~to ASC Topic 740-10: Income Taxes related to the accounting for uncertainty in income taxes, the evaluation of a tax position is a two-step process. The first step is to determine whether it is more likely than not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at ~~September~~the 30largest amount of benefit that is greater than 50% likelihood of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met. The accounting standard also provides guidance on de-recognition, ~~2015~~classification, interest and ~~December~~penalties, 31accounting in interim periods, ~~2014~~disclosures, ~~consist~~and transition. ofThe adoption had no effect on the ~~following:~~Company’s consolidated financial statements.

	September 30, 2015			December 31, 2014
	(in thousands)
Convertible notes payable with a bifurcated conversion option		3,785			2,943
Related party and Officer Notes		1,045			169
Other notes payable		176			185
Discount on notes payable		(195	)		(531	)
		4,811			2,766
Less current portion		(4,811	)		(2,480	)
Non-current notes payable		-			286

Concentrations of Major Customer and Major Vendors

~~Convertible~~Brace ~~Notes~~Shop, ~~with~~LLC holds a ~~Bifurcated~~United ~~Conversion~~States ~~Option~~Government GSA VA government contract. Revenues from this contract are approximately 1.64% and 1.53% of total revenues in for the six months ended June 30, 2016 and 2015, 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 VA contract, this could result in a loss of business.

~~During~~As ~~the~~of ~~nine~~June ~~months ended September~~ 30, ~~2015,~~2016 ~~the~~approximately ~~Company~~95% ~~issued convertible promissory notes in the aggregate principal amount~~ of ~~$1,086,962,~~ ~~and~~accounts ~~received~~receivable ~~net~~was ~~proceeds of $984,106. These notes are generally~~ due from one year after the date of issuance, bear interest at rates of 1% to 12% per annum, and are convertible into shares of common stock at 57% to 61% of the market price of the Company’s common stock based on the low end of the trading range of the common stock during the 10 to 30 days prior to conversion, depending on the specific note being convertedcustomer.

~~With~~As ~~respect~~of toDecember ~~the foregoing notes~~31, in2015 ~~the~~approximately ~~event~~83% ~~the Company were to issue or sell, or is deemed to have issued or sold, any shares~~ of ~~common~~accounts ~~stock~~receivable ~~for~~was adue ~~consideration~~from ~~per~~one ~~share~~merchant ~~(the~~bank ~~“New~~related ~~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~~processing ~~price~~of ~~then in effect is reduced to an amount equal to the New Issuance Price~~on-line orders.

InAs ~~connection with the issuance~~ of ~~one~~June ~~of the foregoing notes~~30, ~~the Company issued a warrant to purchase 50 shares of the Company’s common stock at an exercise price of $210 per share~~2016, ~~subject~~two tovendors ~~adjustment~~accounted for ~~stock~~32% ~~splits, stock dividends and stock combinations (the “March 2015 Warrant”). The March 2015 Warrant is exercisable at any time until three years after the date~~ of ~~issuance.~~ ~~The~~accounts 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 agreementpayable. ~~The Company determined that the fair value of the March 2015 Warrant was de minimus at the date of issuance and at September 30, 2015.~~

~~During~~As ~~the nine months ending September 30, 2015, $597,474~~ of ~~previously~~December ~~issued convertible notes~~31, along with $10,375 of accrued interest, were converted into 461,247 shares of the Company’s common stock, and $94,675 of convertible notes were repaid in accordance with their terms. In connection with the notes converted, approximately $168,000 of the bifurcated option liability was reclassified into additional paid-in capital. Also during the nine months ending September 30, 2015, the Company entered into a settlement agreement with one of its convertible noteholders which reduced the outstanding principal balance on their notes by $9,375, which was recorded as a gain on the settlement of debt and is reflected in other income in the accompanying consolidated statements of operations for the three ~~and~~vendors ~~nine~~accounted ~~months ended September 30, 2015. In addition, the Company received additional notices~~ for ~~the~~ ~~conversion~~38% of ~~$3,860~~accounts ~~convertible notes that the Company was unable to honor~~payable.

The ~~Company’s~~Brace ~~failure~~Shop, toLLC ~~(i)~~has ~~timely~~a ~~file~~concentration ~~its~~of ~~Quarterly~~major ~~Report~~vendors. onDuring ~~Form 10-Q for~~ the ~~period~~six ~~ending~~months ended June 30, ~~2015 with SEC~~2016, ~~(ii) repay~~two ~~certain~~vendors ~~convertible~~accounted ~~notes~~for ~~that had reached their maturity date and (iii) honor the foregoing conversion notices, constitute~~47% ~~events~~ of ~~default~~cost ~~under the terms~~ of ~~the~~retail ~~convertible~~sales ~~notes. The terms of some of the convertible notes require that the outstanding principal amount on the notes increase by~~ as ~~much~~follows; ~~as 50~~25% ~~in the event of a default. As a result, the Company recorded additional principal on these notes~~ and ~~a corresponding non-cash interest charge in the amount of $456,684~~22%. ~~At September 30, 2015, the outstanding balance on these convertible notes was $3,785,514.~~

The Brace Shop, LLC has a concentration of major vendors. During the six months ended June 30, 2015, two vendors accounted for 43% of cost of retail sales as follows; 23% and 20%.

The Company had foreign sales totaling $158,188 or 4.5% of total revenue of $3,484,999 for the six months ended June 30, 2016. For the six months ended June 30, 2015 the Company had foreign sales totaling $287,032 or 8.5% of total revenue of $3,373,257.

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 have a Variable Interest Entity (VIE) relationship, however the revenue stream related to the VIE 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.

VERITEQ CORPORATION AND SUBSIDIARIES

~~Notes~~CONDENSED toNOTES TO ~~Condensed~~CONSOLIDATED ~~Consolidated~~FINANCIAL ~~Financial Statements (unaudited)~~STATEMENTS

~~September~~ JUNE 30, ~~2015~~2016

As more fully described in note 12, on October 19, 2015, the Company received a default notice from its senior lender, acting in its capacity as collateral agent representing approximately $2.2 million of senior convertible notes with first priority security interests on the Company’s assets, demanding repayment of these notes. The Company did not have the financial resources to repay this indebtedness. In conjunction with the default notice, the Company received a Notification of Disposition of Collateral, advising the Company that the senior lender intended to sell, lease or license the assets securing the senior convertible notes at a public auction. The auction took place on November 4, 2015 and the senior lender received proceeds of $1.0 million, which was credited against the Company’s outstanding balance of convertible notes. The remaining outstanding convertible notes currently accrue default interest at rates ranging from of 18% to 22% per annum, and the holders of the notes retain their right to convert the outstanding principal plus accrued and unpaid interest into shares of the Company’s common stock in accordance with the terms of the notes.(Unaudited)

~~Related~~Recent ~~Party~~Accounting ~~Notes Payable~~Pronouncements

OnFrom ~~January~~time ~~23,~~to ~~2015~~time, the ~~Company~~Financial ~~borrowed~~Accounting ~~$45,000~~Standards ~~from~~Board ~~Scott Silverman, as evidenced by a promissory note~~ (~~the~~ “~~2015 Silverman Note~~FASB”). ~~The~~or ~~2015~~other ~~Silverman~~standards ~~Note~~setting ~~was~~bodies ~~payable~~will onissue ~~demand,~~new ~~and bearing interest at a rate of 5% per annum~~accounting pronouncements. ~~Between~~Updates ~~January~~to ~~30, 2015 and September 30, 2015,~~ the ~~2015~~FASB ~~Silverman~~ASC ~~Note~~are ~~was~~communicated ~~repaid~~through inissuance ~~its~~of ~~entirety,~~an ~~and~~Accounting ~~Mr.~~Standards ~~Silverman~~Update ~~agreed to forgo receiving interest~~(“ASU”). onThere ~~the~~have ~~note.~~been ~~During~~no ~~the~~new ~~nine~~relevant ~~months~~pronouncements ~~ending~~since ~~September~~those ~~30,~~disclosed ~~2015,~~in the ~~Company~~December ~~also received $21~~31,~~100~~ of2015 ~~short-term~~Consolidated ~~advances~~Financial ~~from Mr~~Statements. ~~Silverman, which were repaid as of September 30, 2015.~~

AsNOTE ~~discussed~~2 in– ~~note~~GOING 3,CONCERN during the nine months ended September 30, 2015, four of the Company’s executive officers entered into agreements with the Company whereby certain amounts of accrued but unpaid compensation that each individual was entitled to receive would be paid in the form of Officer Notes, and the Company issued an aggregate of $913,519 of Officer Notes in satisfaction of the accrued liabilities. In addition, Mr. Geissler and Mr. Krawitz agreed to have their previously issued and outstanding demand notes due from the Company, in the principal amounts of $34,000 and $60,000, respectively, converted into separate Officer Notes. The Officer Notes bear interest at a rate of 5% per annum, with principal and interest due on March 1, 2016.

The ~~Company~~accompanying ~~has~~unaudited consolidated financial statements are prepared assuming the ~~option~~Company towill ~~prepay~~continue as a going concern which contemplates the ~~Officer~~realization ~~Notes,~~of inassets ~~whole~~and orsatisfaction of liabilities in ~~part,~~the ~~and~~normal ~~without~~course ~~premium~~of orbusiness. ~~penalty~~At June 30, 2016, atthe ~~any~~Company ~~time~~had ~~upon~~a 5stockholders’ ~~business~~deficit of approximately $16 million and a working capital deficiency of ~~days’~~$14,924,369. ~~written~~For ~~notice~~the tosix months ended June 30, 2016 the ~~holder~~net loss totaled $435,907. AtThe ~~any~~net ~~time~~cash ~~after~~used ~~September~~in 1operating activities for the six months ended June 30, ~~2015~~2016 totaled $304,865. These matters raise substantial doubt about the ~~holder~~Company’s ability to continue as a going concern. The ability of anthe ~~Officer~~Company ~~Note~~to ~~can~~continue ~~convert~~as ~~all~~a orgoing concern is dependent upon ~~part~~increasing ofsales and obtaining additional capital and financing. While the ~~note~~Company ~~into~~believes ~~shares~~in the viability of ~~the~~its strategy to increase sales volume there can be no assurances to that effect. The Company’'s ~~common~~limited ~~stock~~financial atresources ahave ~~conversion~~prevented the ~~price~~Company ~~equal~~from aggressively advertising its products to ~~the~~achieve ~~average~~increased ~~daily~~consumer ~~closing~~recognition. ~~price~~These unaudited consolidated financial statements do not include any adjustments relating to recovery of ~~the~~recorded ~~Company’s~~assets ~~common~~or ~~stock~~classification ~~for~~of liabilities should the 10Company ~~days~~be ~~prior~~unable to ~~conversion~~continue as a going concern.

OnNOTE ~~April~~3 ~~16,~~– 2014 and May 1, 2014, the Company issued promissory notes to Ned L. Siegel in the principal amount of $30,000 and $20,000, respectively (collectively, the “Siegel Notes”), with interest accruing at a rate of 9% per annum and with principal and interest due on these notes one year after their date of issuance. Mr. Siegel was appointed a director of the Company on June 17, 2014, and resigned from the Company’s board of directors on January 28, 2015. On February 27, 2015, the Siegel Notes were amended to (i) extend the maturity date to March 1, 2016, and (ii) reduce the per share conversion price from $350 to 60% of the average of the three lowest closing prices of the Company’s common stock for the 10 trading days prior to conversion.INVENTORY

~~During~~Inventory, ~~the~~consists ~~nine~~of ~~months~~finished ~~ending~~goods ~~September~~which ~~30,~~are ~~2015,~~stated ~~$37,924~~at ofthe ~~related~~lower ~~party~~of ~~notes,~~cost ~~along~~and ~~with~~net ~~$1,483~~realizable ofvalue ~~accrued~~utilizing ~~interest,~~the ~~were converted into 26~~first-in,~~720~~ ~~shares~~first-out ~~of common stock~~method. As of ~~September~~June 30, ~~2015~~2016 ~~there~~and ~~were~~December $131,~~044,595~~ of2015 ~~related~~the ~~party~~inventory ~~notes~~balance ~~outstanding.~~was ~~In addition~~$242, ~~the~~590 ~~Company~~and ~~received additional notices for the conversion of~~ $3301,~~300~~883, ~~related party notes that the Company was unable to honor~~respectively.

~~Other~~NOTE ~~Notes~~4 ~~Payable~~– MORTGAGE NOTES PAYABLE

~~Other~~On ~~notes~~June ~~payable~~29, as2012 ofBraceshop ~~December~~Real 31Estate Holdings, ~~2014~~LLC ~~consisted~~executed of a mortgage note payable to ~~PositiveID~~a ~~Corporation~~bank ~~(“PSID”)~~ in the ~~principal~~ amount of ~~approximately~~ $~~115~~477,~~000~~500 ~~(the~~relating to ~~“PSID~~an ~~Note”)~~office ~~which~~condominium iswhere tothe beCompany’s ~~repaid~~corporate ~~through~~offices ~~the~~are ~~issuance~~located. ofThe aterms ~~de minimus number~~ of ~~shares~~the ofnote includes the Company’s ~~stock,~~remitting nine ~~and~~monthly ~~other~~consecutive ~~promissory~~interest ~~notes~~payments, ~~with~~beginning anJuly ~~aggregate~~29, ~~principal~~2012, ~~amount~~with ofinterest ~~$70,625~~calculated ~~that~~on ~~are~~the ~~generally~~unpaid principal balance ~~convertible~~using ~~into~~an ~~shares~~interest rate of ~~the~~5.3% ~~Company’s~~per ~~common~~annum ~~stock~~based aton ~~the~~a ~~option~~year of ~~the~~360 ~~holder~~days; atone ahundred ~~conversion~~nineteen ~~price~~monthly consecutive principal and interest payments of $3,~~500~~252 each beginning April 29,~~000~~ ~~per~~2013, with interest calculated on the unpaid principal balance using an interest rate ~~share~~of 5.3% ~~For~~per ~~some~~annum based on a year of ~~these~~360 ~~notes~~days and one principal and interest payment of $304,535 ~~the~~due ~~Company~~on ~~may~~March 29, at2023. ~~its~~Braceshop Real ~~sole~~Estate ~~option~~Holdings, ~~elect~~LLC torecorded ~~convert~~loan costs on the mortgage note ~~into~~payable ~~common~~as ~~stock~~a atdebt adiscount. ~~conversion price~~The ~~that~~loan iscosts ~~equal~~are tobeing ~~60%~~amortized over the term of the ~~market~~mortgage ~~price~~notes ofpayable. The effective interest rate resulting from the ~~Company’s~~debt ~~common~~discounts ~~stock,~~was asnot ~~defined~~materially changed infrom the ~~notes~~5.3%. ~~During~~The balance of the ~~nine~~mortgage ~~months ended~~note ~~September~~payable ~~30,~~was ~~2015~~$425,433, net of debt discount of $94,~~400~~855 (principal balance of ~~these notes~~$430,288) ~~plus~~and $1432,~~537~~882, net of ~~accrued~~debt ~~interest~~discount of $5,202 ~~was~~(principal ~~converted~~balance ~~into~~of 10$438,084) ~~shares~~as of ~~the~~June ~~Company’s~~30, 2016 and December 31, ~~common~~2015 ~~stock~~respectively.

AtOn ~~September~~June 3029, ~~2015~~2012 Braceshop Real Estate Holdings, LLC executed a mortgage note payable due to the ~~total~~Florida ofBusiness ~~all~~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 ~~promissory~~from June ~~notes~~2012 ~~were~~to ~~convertible~~June ~~into~~2013. The terms of the note includes an ~~aggregate~~interest rate of 2.10738%, first payment due June 1, 2013 with a note ~~117~~maturity date of May 1, 2033. The balance of the mortgage note payable was $342,380 and $350,~~460~~760 ~~shares~~as of June 30, 2016 and December 31, 2015 respectively. The FBDC mortgage is a second mortgage subordinated to the ~~Company’s~~bank ~~common~~mortgage ~~stock~~discussed above.

Both of the above mortgage notes are personally guaranteed by the sole member of Braceshop Real Estate Holdings, LLC and the sole member’s spouse who is the Company’s CEO and guaranteed by Brace Shop, LLC.

NOTE 5 – LINE OF CREDIT

On September 30, 2013 the Company opened a $350,000 bank line of credit with a bank 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 was to 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 (3.5% at March 31, 2016). As of March 31, 2016 the line of credit is in default. The Company’s management executed a Forbearance and Modification Agreement related to the line of credit on June 1, 2016. Modified payments commenced on June 1, 2016 and are due on the first of each month going forward until April 1, 2017. The monthly payments will be $17,500 for the period of June 1, 2016 through July 1, 2016; $20,000 for the period of August 1, 2016 through September 1, 2016; and $25,000 for the period of October 1, 2016 through April 1, 2017. A final payment for the remaining balance is due on May 1, 2017. The balance of the line of credit amounted to $331,653 and $349,000 as of June 30, 2016 and December 31, 2015, respectively.

VERITEQ CORPORATION AND SUBSIDIARIES

~~Notes~~CONDENSED toNOTES TO ~~Condensed~~CONSOLIDATED ~~Consolidated~~FINANCIAL ~~Financial Statements (unaudited)~~STATEMENTS

~~September~~ JUNE 30, ~~2015~~2016

During the nine months ended September 30, 2015 and 2014, the Company recognized interest expense of approximately $1.6 million and $2.1 million, respectively, which is primarily related to the amortization of debt discounts and, in 2015, recognition of additional principal due to the defaults on convertible notes.(Unaudited)

5.NOTE ~~SUBORDINATED~~6 ~~DEBT~~– ~~REPORTED~~NOTES ~~AT FAIR VALUE~~PAYABLE

InNotes ~~December~~payable ~~2012,~~consist 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, or 33,333,333 shares of common stock as of September 30, 2015. The SNC Note was amended in July 2013 to extend the maturity date to June 30, 2015. The SNC Note has not been repaid.following:

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 September 30, 2015 and December 31, 2014, the fair value of the SNC Note was $0.5 million and $0.3 million, respectively (see notes 6 and 12 for further information).

	June 30,			December 31,
	2016			2015
	(unaudited)
Convertible notes payable with a bifurcated conversion option (including premium of $160,000)		5,010,710			0
Related party notes payable		250,000			125,000
Other notes payable		183,475			249,322
Discounts on notes payable		(483,245	)		(33,071	)
		4,960,940			341,251
Less current portion		(4,827,607	)		(341,251	)
Non-current notes payable		133,333			-

6.Convertible ~~FINANCIAL~~notes ~~INSTRUMENTS AND FAIR VALUE MEASUREMENTS~~

~~Fair~~New ~~value~~Activity ~~is defined as the price that would be received from selling an asset or paid to transfer a liability~~ in an2016 ~~orderly~~consists ~~transaction between~~of ~~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.following:

~~The~~On ~~Company~~May ~~applies~~6, 2016 the ~~following~~Company ~~fair~~assumed ~~value hierarchy~~$4,485,541 ~~which~~of ~~prioritizes~~convertible ~~the~~notes ~~inputs~~made ~~used~~up toof ~~measure~~56 ~~fair~~different ~~value~~notes ~~into~~from ~~three~~19 ~~levels~~ lenders and ~~bases~~$176,208 ~~the~~of discounts ~~categorization~~as ~~within~~a result of the ~~hierarchy~~reverse ~~upon~~acquisition ~~the~~and ~~lowest~~recapitalization ~~level~~(see note 1). The assumed convertible notes have conversion terms which includes 39% to 40% discounts of ~~input~~the ~~that~~average istrading ~~available~~prices ~~and~~ranging ~~significant~~of one to three days of the ~~fair~~lowest traded prices ~~value~~for ~~measurement:~~periods of ten to thirty days prior to conversion.

~~Level~~On February 26, 2016, the Company borrowed funds and issued a 16% senior secured convertible promissory note with a principal balance of $240,000. Payments of $8,267 are due on the first and fifteenth of each month starting April 1, –2016 ~~Quoted~~and ~~prices~~ending September 15, 2017. The installments will pay off the note in ~~active~~full. ~~markets~~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 recorded this as stock settled debt with a $160,000 premium. In the event of a default, the note holder may elect the Company to redeem the note in cash by wire transfer of immediately available funds at a price equal to the greater of (x) 115% of the Conversion Amount being redeemed and (y) the product of (A) the Conversion Amount being redeemed and (B) the quotient determined by dividing (I) the greatest Closing Sale Price of the shares of Common Stock during the period beginning on the date immediately preceding such event of default. In the event that the note is converted or redeemed (including via an Event of Default) prior to the maturity date, the Company shall pay to the note holder, in addition to any other amounts then owed, in cash upon such conversion or redemption, an amount in interest equal to the amount of interest that would otherwise have been payable if the note had been held until the maturity date. If the Company fails, on or prior to the Share Delivery Date, to issue and deliver a certificate to the note holder, the number of shares of Common Stock to which the note holder is entitled upon the note holder’s conversion of any Conversion Amount (a “Conversion Failure”), then (A) the Company shall pay damages to the note holder for ~~identical~~each ~~assets~~Trading Day of such Conversion Failure in an amount equal to 1.5% of the product of (1) the sum of the number of shares of Common Stock not issued to the note holder on or ~~liabilities~~prior to the Share Delivery Date and to which the note holder is entitled, and (2) any trading price of the Common Stock selected by the note holder in writing as in effect at any time during the period beginning on the applicable Conversion Date and ending on the applicable Share Delivery Date and (B) the note holder, upon written notice to the Company, may void its Conversion Notice with respect to, and retain or have returned, as the case may be, any portion of the senior secured promissory note that has not been converted pursuant to such Conversion Notice; provided that the voiding of a Conversion Notice shall not affect the Company’s obligations to make any payments which have accrued prior to the date of such notice. The Company shall not effect the conversion of any portion of the senior secured promissory note, and the note holder shall not have the right to convert any portion of the senior secured promissory note, to the extent that after giving effect to such conversion, the note holder together with the other Attribution Parties collectively would beneficially own in excess of 4.99% (the “Maximum Percentage”) of the shares of Common Stock outstanding immediately after giving effect to such conversion. On each applicable Installment Date, the Company shall pay the installment amount by redeeming such installment amount in cash (a “Company Redemption”) or, if elected by the note holder, such combination of the installment amount in cash and Common Stock, provided that certain equity conditions have been met. At any time upon ten (10) business days prior written notice to the note holder, the Company may redeem all or any portion of this senior secured promissory note by delivering written notice thereof (the “Redemption Notice”) to the note holder, which Redemption Notice shall indicate the portion of the senior secured promissory note the Company is electing to require the note holder to redeem. Each portion of the senior secured promissory note subject to redemption by the Company shall be redeemed by the Company in cash by wire transfer of immediately available funds at a price equal 115% of the amount being redeemed. As of June 30, 2016 the Company has only remitted one payment of $8,267 to the lender related to this promissory note. As of June 30, 2016 the balance of this convertible promissory note amounted to $393,333, including the premium of $160,000.

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.

As of September 30, 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 and nine months ended September 30, 2015 and 2014 are reflected in Changes in fair value of derivative and other fair valued instruments in the Company’s consolidated statement of operations. As of September 30, 2015, non-financial assets measured at fair value were the intangible asset value of $1.0 million, based on a level 1 input (see note 12).

VERITEQ CORPORATION AND SUBSIDIARIES

~~Notes~~CONDENSED toNOTES TO ~~Condensed~~CONSOLIDATED ~~Consolidated~~FINANCIAL ~~Financial Statements (unaudited)~~STATEMENTS

~~September~~ JUNE 30, ~~2015~~2016

~~The following table summarizes the Company’s financial assets and liabilities measured at fair value as presented in the consolidated balance sheets as of September 30, 2015 and December 31, 2014~~ (~~in thousands~~Unaudited):

	September 30, 2015						December 31, 2014
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
Liabilities:
SNC Note	$	—	$	—	$	490	$	—	$	—	$	316
Bifurcated option in convertible notes	$	—	$	—	$	6,246	$	—	$	—	$	930
Warrant liabilities	$	—	$	—	$	2,086	$	—	$	—	$	534

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.

~~The~~With ~~following~~respect to the June 14, 2016 note, in the event the Company were to issue or sell, or is adeemed ~~summary~~to ofhave ~~activity~~issued ofor ~~Level~~sold, 3any ~~liabilities~~shares of common stock for a consideration per share (the ~~nine~~“New ~~months~~Issuance ~~ended~~Price”) ~~September~~that 30is less than the conversion price in effect immediately prior to such issue or sale or deemed issuance or sale (a “Dilutive Issuance”), ~~2015:~~then, immediately after such Dilutive Issuance, the conversion price then in effect is reduced to an amount equal to the New Issuance Price.

	SNC Note		Bifurcated embedded option in convertible notes			Warrant liabilities
Balance at December 31, 2014	$	316	$	930		$	534
Issuance of additional debt				386
Conversion of notes and exercise of warrants into shares of common stock				(168	)		(11	)
Losses (gains) included in net loss		174		5,098			1,563
Balance at September 30, 2015	$	490	$	6,246		$	2,086

These above June 14, 2016 notes and the convertible notes assumed on May 6, 2016 include embedded conversion options which will be bifurcated and accounted for as derivative liabilities at fair value (see Note 1). 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. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity.

7.Related ~~STOCKHOLDERS’~~party ~~DEFICIT~~notes payable

~~Preferred~~On ~~Stock~~each of January 6, 2016 and February 4, 2016 the CEO/sole member of the Company advanced $62,500 which was memorialized in a $125,000 non-interest bearing promissory note payable to the CEO/sole member of the Company on February 4, 2016. The note matures on May 1, 2016, however the note maturity date was extended to December 1, 2016.

AsOther ofnotes September 30, 2015, the Company has authorized 5 million shares of preferred stock, par value $0.01 per share with 1,841 shares of Series D Convertible Preferred Stock (the “Series D Preferred Stock”) outstanding, of which 1,400 shares are held by Scott Silverman and 441 shares are held by Randolph Geissler. The stated value of the Series D Preferred Stock is reflected as temporary equity in the Company’s consolidated balance sheet, due to the possibility that under certain conditions the Series D Preferred Stock could be required to be settled in cash. On March 13, 2015, the Company’s Board of Directors approved an amendment to the Certificate of Designation for the Series D Preferred Stock to change the price for which the Series D Preferred Stock can be converted into common stock of the Company to the average closing price of the 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.payable

~~Common~~On ~~Stock~~June 27, 2016 the Company issued a promissory note with a principal balance of $184,500, an original issue discount (OID) of $34,500 and a debt issue cost discount of $2,630. The OID and issue costs are to be amortized over the term of the note. The Company received cash proceeds of $147,370 related to this promissory note. The terms of this promissory note include the lender drafting $1,025 each business day from the Company’s primary business account. The balance of this note payable amounted to $146,345 net of debt discount and OID of $37,130 as of June 30, 2016.

AsInterest ~~previously~~expense ~~discussed~~was inapproximately ~~note 1~~$387,000 ~~the February 2015 Reverse Stock Split became effective on February 11, 2015,~~ and ~~the July 2015 Reverse Stock Split became effective on July 29~~$25,000 ~~2015. All share, per share and capital stock amounts have been retroactively restated as of September 30, 2015 and December 31, 2014, and~~ for the ~~three~~six ~~and nine~~ months ended ~~September~~June 30, ~~2015~~2016 and ~~2014~~2015, ~~to give effect to the reverse stock splits~~respectively.

On April 20, 2015, the Company sold 526 shares of its common stock to a director of the Company for a purchase price of $10,000. The purchase price was based on the closing price of the Company’s common stock on April 19, 2015.

On April 22, 2015, the Company sold 666 shares of its common stock to Mr. Silverman for $10,000. The purchase price was based on the closing price of the Company’s common stock on April 21, 2015.

On May 12, 2015, a director of the Company converted outstanding amounts owed to him in the amount of $32,101, into 10,700 shares of common stock. The number of shares issued was based on the closing price of the Company’s common stock on May 11, 2015.

VERITEQ CORPORATION AND SUBSIDIARIES

~~Notes~~CONDENSED toNOTES TO ~~Condensed~~CONSOLIDATED ~~Consolidated~~FINANCIAL ~~Financial Statements (unaudited)~~STATEMENTS

~~September~~ JUNE 30, ~~2015~~2016

~~On August 13, 2015, the Compensation Committee of the Company’s Board of Directors~~ (~~the “Compensation Committee”~~Unaudited) granted 100,000,000 shares of restricted common stock to executive officers of the Company and options to purchase 148,500,000 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 and vested on the date of grant. 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 vests on January 2, 2017 or upon a change of control.

~~The~~NOTE ~~stock~~7 ~~options~~– ~~granted~~SUBORDINATED ~~were~~DEBT ~~valued~~REPORTED atAT ~~the~~FAIR date of grant using the Black-Scholes valuation model, with the following assumptions: risk-free interest rate of 2.19%, dividend yield of 0% and volatility of 694.91%. For the three and nine months ended September 30, 2015, the Company recorded compensation expense of $5.3 million with respect to the stock options. The grant date fair value of the restricted common stock is being expensed over the vesting period, and the Company recorded $0.9 million in stock-based compensation in the three and nine months ending September 30, 2015.VALUE

AsOn May 6, 2016 as a result of ~~September~~the ~~30,~~reverse ~~2015,~~acquisition and recapitalization (see note 1) the Company assumed a non-interest bearing secured subordinated convertible note accounted for using the fair value option under ASC 825 “Financial Instruments” (SNC Note). The fair value note was $249,495 on the assumption date and the note had ~~100~~a ~~billion~~principal amount due of $3.3 million. Changes in the fair value are recorded through the Company’s statement of operations in each accounting period. The SNC Note is secured by all of the assets acquired by Veriteq under the 2012 asset purchase agreement (the “SNC Collateral”) consisting primarily of intellectual property. The note is convertible into one-third of the beneficial common stock ownership of the former CEO of Veriteq. At June 30, 2016 the former CEO owned 39 shares of Series E preferred stock convertible into 3.9% of the outstanding common stock ~~authorized~~of ~~and~~the ~~250~~Company on a fully diluted basis. Under the terms of the SNC Note,~~723~~ as amended,~~718~~ ~~shares~~the ~~were~~holder ~~issued~~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 ~~outstanding~~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 ~~including~~the return of the ~~250~~SNC ~~million~~Collateral ~~shares~~to the holder in satisfaction of ~~restricted~~the ~~common~~SNC ~~stock~~Note. ~~issued~~By letter agreement dated February 18, 2016, the Company agreed to ~~certain~~return the SNC Collateral to the holder of the SNC Note, and the holder agreed to discharge the Company’s ~~officers~~of all of its obligations and ~~directors~~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 15). The fair value of the note was $263,138 at June 30, 2016.

~~Warrants~~NOTE ~~Treated~~8 as– ~~Liabilities~~RELATED PARTIES LOANS PAYABLE

On ~~November~~September 1329, ~~2013 in connection with the issuance of senior convertible notes and an amendment to certain agreements between the Company and PSID~~2015, the ~~Company~~Chief ~~issued~~Executive ~~warrants~~Officer to(CEO) ~~purchase up to 2,944,444 shares~~ of the Company’s, ~~common~~who ~~stock~~is ~~on a pre-split basis (~~the ~~“November~~sole ~~2013~~member ~~Warrants”). The November 2013 Warrants became exercisable at issuance and entitle the Investors to purchase shares~~ of the ~~Company’s~~LLCs, ~~common~~advanced ~~stock for~~ a ~~period of five years at an initial exercise price (prior to giving~~non-interest ~~effect~~bearing toloan ~~the reverse split)~~ of $~~2.84 per share~~100,000 ~~contain~~to athe ~~cashless~~Company ~~exercise~~for ~~provision~~operating ~~and a full ratchet price protection provision on the exercise price~~activities. AsDuring ~~of September 30,~~ 2015, ~~after~~the ~~consideration~~Company ofrepaid ~~both reverse stock splits and based on~~ the ~~aggregate~~CEO ~~exercise price of~~ $228,~~821,580,~~000. ifThe ~~all~~ balance of the ~~remaining~~loan ~~November~~amounted ~~2013~~to ~~Warrants had been exercised the number of shares of the Company’s common stock that would have been issued would have been 67~~$72,~~180,477~~000 ~~shares~~as ~~based on an exercise price~~ of ~~$0.042~~ ~~per~~June ~~share, subject to adjustment for the cashless exercise provisions. During the nine months ended September~~ 30, ~~2015,~~2016 ~~the Company issued 223,817 shares of common stock for November 2013 Warrants exercised on a cashless basis~~ and ~~approximately~~December ~~$11~~31,~~000~~ ~~of warrant liabilities were reclassified to additional paid in capital~~2015.

~~During~~On ~~the~~October ~~nine months ended September 30~~19, 2015, the ~~Company~~Medical ~~issued~~Director of the ~~March~~Company ~~2015~~who ~~Warrant (see note 4). The March 2015 Warrant~~ is ~~exercisable at any time until three years after~~ the ~~date~~husband of ~~issuance. The terms of~~ the ~~warrant~~sole ~~provides~~member ~~for~~advanced a ~~proportional~~non-interest ~~downward~~bearing ~~adjustment~~loan of ~~the~~$49,500 ~~exercise~~to ~~price in~~ the ~~event that the~~ Company ~~issues~~for oroperating ~~sells,~~activities. orThe isbalance ~~deemed to have issued or sold, shares~~ of ~~common stock at an issuance price that is less than~~ the ~~market~~loan ~~price~~amounted ofto ~~the common stock at the time of issuance~~$49,500 as ~~defined in the warrant agreement. The Company determined that the fair value~~ of ~~the~~June ~~March~~30, ~~2015~~2016 ~~Warrant was de minimus at the time of issuance~~ and atDecember ~~September 30~~31, 2015.

~~The~~NOTE ~~terms~~9 of– ~~the~~GUARANTEE 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 September 30, 2015 and December 31, 2014. The carrying amount of the warrant liabilities approximate management’s estimate of their fair value (see note 6) and were determined to be $2.1 million and $0.5 million at September 30, 2015 and December 31, 2014, respectively. The Company recognized a loss on the change in fair value of the Company’s warrant liabilities for the three months ended September 30, 2015 of $24,000 and a gain of $1.5 million for the three months ended September 30, 2014. The Company recognized a loss on the change in fair value of the warrant liabilities of $1.6 million and $1.3 million for the nine months ended September 30, 2015 and 2014, respectively.LIABILITY

8The Brace Shop, LLC, the CEO of the Company and VeriTeQ Corporation, are parties to a Stock Purchase Agreement dated November 25, 2015. ~~INCOME~~ The sole member of Brace Shop, LLC, is to sell all of her membership interests in Brace Shop, LLC to VeriTeQ Corporation. ~~TAXES~~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. In February 2016, pursuant to the Stock Purchase Agreement another 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 $294,117 and $147,058 as of March 31, 2016 and December 31, 2015, respectively. On May 6, 2016 the acquisition of Brace Shop was completed, at which time Brace Shop became a wholly owned subsidiary of the Company. As a result of the completion of the acquisition the guarantee liability of $294,117 was removed from the balance sheet and recognized as other income on the statement of operations.

~~The~~NOTE ~~Company~~10 ~~did~~– ~~not~~COMMITMENTS ~~record~~AND an income tax provision or benefit for the three and nine months ended September 30, 2015 and 2014. The Company has incurred losses since its inception and has provided a valuation allowance against its net operating loss carryforwards and other net deferred tax assets.CONTINGENCIES

The Company has entered into a lease for its office space as disclosed in Note 11 – 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 5).

In November 2015 the Company executed a 6-month consulting agreement related to the Stock Purchase Agreement discussed in Note 1. 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. The agreement automatically renews every six months unless otherwise terminated by either party with 30 days advance notice. As of June 30, 2016 the Company accrued $8,333 of consulting fees pursuant to the common shares due under the consulting agreement. As of June 30, 2016 there has not been any common shares issued related to the consulting agreement.

As a result of the foreclosure and disposal of Veriteq’s VAC subsidiary, prior to the reverse acquisition of May 6, 2016, 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, however in April 2016 one of the noteholders forgave $319,000 of his notes in connection with a separate release agreement. As of June 30, 2016 the remaining debt in dispute is recorded on the books of the Company until this dispute is resolved.

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.

VERITEQ CORPORATION AND SUBSIDIARIES

~~Notes~~CONDENSED toNOTES TO ~~Condensed~~CONSOLIDATED ~~Consolidated~~FINANCIAL ~~Financial Statements (unaudited)~~STATEMENTS

~~September~~ JUNE 30, ~~2015~~2016

~~9. RELATED PARTY TRANSACTIONS~~ (Unaudited)

~~See~~NOTE ~~notes~~11 3,– 4VARIABLE ~~and~~INTEREST ~~7 for disclosures regarding transactions with related parties.~~ENTITY

10Current 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, ~~COMMITMENTS~~a ~~AND~~reporting ~~CONTINGENCIES~~ entity (lessee) to consolidate a lessor entity when both entities are under common control.

InOn March ~~2013~~20, VC2014, ~~appointed a liquidator and initiated~~ the ~~formal~~Financial ~~liquidation~~Accounting ofStandards ~~its~~Board ~~U.K. subsidiary, Signature Industries Limited~~ (~~“Signature”~~FASB), ~~primarily~~issued ~~related~~Accounting toStandards ~~its~~Update ~~outstanding~~(ASU) ~~liabilities. VC used £40~~2014-07,~~000~~ Consolidation (~~approximately~~Topic ~~$61,000~~810): ~~of the~~Applying ~~proceeds~~Variable ~~from~~Interest ~~the~~Entities ~~sale~~Guidance ofto ~~Signature’s~~Common ~~former~~Control ~~division~~Leasing Arrangements, ~~Digital~~providing ~~Angel~~private ~~Radio Communications Limited (“DARC”)~~companies towith ~~satisfy~~accounting ~~its~~alternatives ~~estimated~~for ~~portion~~lease ofarrangements ~~Signature’s~~meeting ~~outstanding~~specified ~~liabilities~~criteria. ~~However,~~This ~~additional~~ASU ~~claims~~is ~~submitted to~~ the ~~liquidator could~~third ~~result~~accounting inalternative ~~the Company being required to pay additional amounts to cover its share of Signature’s outstanding liabilities.~~for ~~The~~private ~~Company~~companies ~~has~~endorsed ~~estimated~~by ~~a potential additional liability of approximately $159,000 which is reflected in accrued expenses in~~ the ~~accompanying~~FASB ~~consolidated~~based ~~balance~~upon ~~sheets~~recommendations as of ~~September~~the ~~30,~~Private ~~2015~~Company ~~and~~Council ~~December 31, 2014~~(PCC).

OnIn ~~January~~December 302013, ~~2014,~~ the ~~Company~~FASB ~~and~~issued ~~the~~ASU ~~buyers~~2013-12, Definition of ~~DARC~~a ~~entered~~Public ~~into~~Business aEntity ~~letter~~– ~~agreement~~An ~~under~~addition ~~which~~to the ~~Company~~Master ~~agreed~~Glossary, which todefines ~~accept~~ a ~~payment~~public ofbusiness ~~£62,000~~entity ~~(USD~~for ~~approximately~~purposes ~~$0.1~~of ~~million)~~GAAP in ~~full~~ASUs ~~and~~issued ~~final~~subsequent ~~settlement~~to ofASU a2013-12 ~~deferred~~(it ~~purchase~~does ~~price~~not ~~related~~change existing todefinitions ~~VC’s~~of ~~sale~~public ofand ~~DARC~~nonpublic inentities ~~March~~contained ~~2013.~~within AsGAAP aresulting ~~result,~~from ~~the~~standards ~~Company~~prior ~~recorded~~to aASU ~~loss~~2013-12). onThis ~~the~~definition is ~~settlement~~not oflimited ~~this~~to ~~receivable~~companies ofthat ~~approximately USD~~are ~~$55,000~~registered inwith the ~~nine~~U.S. ~~months~~Securities ~~ended~~and ~~September~~Exchange 30Commission, ~~2014~~but includes, ~~which~~among isothers, entities ~~reflected~~whose infinancial ~~Other~~statements ~~expenses~~are included in filings with the ~~Company’s~~SEC ~~consolidated statement~~and ofentities ~~operations.~~with ~~All~~securities oftraded in the ~~other~~OTC ~~provisions~~markets. As ~~(including~~such, ~~without~~an ~~limitation,~~entity ~~the~~considering ~~indemnities)~~adoption ~~agreed~~of ~~between VC, and/or~~ the ~~Buyers~~accounting ~~under~~alternatives ~~the~~provided ~~stock~~in ~~purchase~~this ~~agreement~~Update ~~and~~should ~~any~~first ~~related~~evaluate ~~documents~~whether ~~remain~~they are inwithin ~~full~~the ~~force~~scope ~~and~~of ~~effect~~the Update.

~~During~~Per ~~the~~Review ~~year~~of ~~ended~~ASU ~~December~~2013-12 31C Brace Shop, ~~2013~~LLC and Braceshop Real Estate Holdings, ~~the~~LLC ~~Company~~need ~~was~~to ~~informed~~consolidate bydue ~~the~~to ~~New~~a ~~Jersey~~VIE ~~Department~~relationship because (i) Brace Shop is the primary beneficiary of ~~Environmental~~Braceshop ~~Protection~~Real ~~that~~Estate aHoldings, ~~predecessor business~~LLC ~~sold~~since ait ~~building~~occupies inthe ~~2006~~office ~~for~~space ~~which~~and (ii) anBrace ~~environmental~~Shop ~~action~~provides ~~has~~financial ~~been~~support ~~claimed.~~to ~~The~~Braceshop ~~claim~~Real isEstate ~~being~~Holdings, ~~reviewed~~LLC by making rental payments for the ~~Company’s~~property and ~~outside~~both ~~legal~~are ~~counsel~~under common control. Since Brace Shop consolidated into Veriteq Corp., ~~and~~a public company, filing with the ~~Company~~SEC ~~has~~they are not ~~yet~~able ~~determined~~to use the ~~impact~~alternative onprovided ~~its~~by ~~financial~~ASU ~~condition,~~2014-07 ~~liquidity~~for orprivate ~~cash flows, if any~~companies.

11Brace Shop, LLC and Braceshop Real Estate Holdings, LLC entered into a lease agreement in July 2012 where in Brace Shop rents office space from Braceshop Real Estate Holdings, LLC. During the six months ended June 30, 2016 and 2015 Brace Shop recorded $91,834 ~~SUPPLEMENTAL~~and ~~DISCLOSURE~~$91,834 OFrespectively, ~~CASH~~of ~~FLOW~~rent ~~INFORMATION~~ expense for the office, which is eliminated in consolidation.

~~Supplemental~~The ~~cash~~assets ~~flow~~and ~~information~~liabilities ~~for~~of the ~~nine~~VIE ~~months~~are ~~ended September 30, 2015 and 2014 were~~ as follows ~~(in thousands)~~:

	2015		2014
	6/30/2016		12/31/2015
Supplemental disclosure of cash flow information:
ASSETS:
Cash paid for interest		-		-
Cash	$	3,523	$	2,727
Cash paid for income taxes		-		-
Office Building and Building Improvement, net		876,334		888,846
Supplemental schedule of non-cash investing and financing activities:
Total Assets	$	879,857	$	891,573
Notes payable and accrued liabilities converted into common stock		690		625
LIABILITIES:
Accrued liabilities satisfied through the issuance of convertible promissory notes to related parties		914		-
Accounts Payable	$	33,007	$	46,742
Issuance of a warrant in connection with a promissory note		-		66
Mortgage Notes Payable, net of discount		767,813		783,642
Cashless exercises of common stock warrants		11		7,048
Total Liabilities	$	800,820	$	830,384
Reclassification of derivative liability to equity upon conversion of notes payable		168		-
Discounts recorded for embedded conversion option liabilities of convertible notes		386		-

12The building and building improvements have been presented separately on the accompanying unaudited consolidated balance sheets as they are secured by a first and second mortgage held by VIE creditors. Furthermore, as discussed in Note 4 the primary beneficiary, ~~SUBSEQUENT~~Brace ~~EVENTS~~ Shop, LLC, has guaranteed the mortgage note obligations.

Issuance of Convertible Notes

Between October 1, 2015 and March 11, 2016, the Company issued convertible promissory notes in the aggregate principal amount of $358,002, for which the Company received $305,898 in net proceeds. 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 $341,176. The Company received no cash proceeds with the issuance of these notes. 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 AND SUBSIDIARIES

~~Notes~~CONDENSED toNOTES TO ~~Condensed~~CONSOLIDATED ~~Consolidated~~FINANCIAL ~~Financial Statements (unaudited)~~STATEMENTS

~~September~~ JUNE 30, ~~2015~~2016

The foregoing notes contain terms similar to those of the convertible notes issued in November 2013 and in 2014, whereby 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”~~Unaudited) 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.

InNOTE ~~November~~12 ~~and~~– ~~December~~RELATED of 2015 the Company issued additional Officer Notes in the aggregate principal amount of $96,955 in settlement of accrued but unpaid compensation. The terms and conditions of these notes are substantially identical to those of the Officer Notes described in note 4.PARTY

~~Defaults~~The onCompany ~~Senior~~has the following balances and ~~Subordinated~~transactions ~~Securities~~with related parties (see Notes 6 and 8):

~~The~~On ~~Company’s~~September ~~failure~~29, to2015, ~~timely file its Quarterly Report on Form 10-Q with~~ the ~~SEC~~Chief inExecutive ~~August~~Officer ~~of 2015~~(CEO), aswho ~~well~~was asthen ~~its~~the ~~failure to~~sole ~~pay~~member ~~some~~ of the ~~convertible notes that became due~~LLCs, ~~constitute events~~ of ~~default on~~ the Company’s ~~outstanding~~advanced ~~convertible~~a non-interest ~~promissory~~bearing ~~notes,~~loan ~~including~~of ~~approximately~~ $~~1.0~~100,000 ~~million~~to ~~of senior secured promissory notes secured by substantially all of~~ the Company’s ~~assets~~for ~~(the~~operating ~~"Senior Notes”)~~activities. AsDuring a2015 ~~result,~~ the Company ~~entered~~repaid ~~into~~the ~~discussions~~CEO ~~with~~$28,000. ~~Magna~~The ~~Equities~~balance I,of ~~LLC,~~the ~~(together~~loan ~~with~~amounted ~~its~~to ~~affiliate~~$72,000 ~~Magna~~as ~~Equities II, “Magna”) the collateral agent for the holders~~ of ~~the~~June ~~Senior Notes~~30, 2016 and ~~agreed~~December to31, ~~the actions taken below~~2015.

On October 19, 2015, the ~~Company~~Medical ~~entered~~Director ~~into~~of athe ~~letter~~Company ~~agreement~~who ~~with~~is ~~Magna~~the ~~pursuant~~husband toof ~~which~~ the ~~Company~~then ~~agreed~~sole tomember ~~exchange~~advanced ~~approximately $1.3~~a ~~million~~non-interest ~~aggregate~~bearing loan ~~principal amount~~ of ~~outstanding~~$49,500 ~~unsecured~~to ~~convertible~~the ~~promissory~~Company ~~notes held by Magna~~ for anoperating ~~equal~~activities. ~~principal amount~~The balance of ~~new secured convertible promissory notes (~~the ~~“New~~loan ~~Magna~~amounted ~~Notes”) intended~~ to be$49,500 ~~pari~~as ~~passu~~of inJune ~~rank~~30, 2016 and ~~priority~~December ~~with~~31, ~~the Senior Notes~~2015. ~~There was no accounting effect to this amendment.~~

On ~~October~~November 1927, 2015, the Company ~~received~~issued a default notice from Magna, acting in its capacity as collateral agent under the security agreement pertaining to the Senior Notes. At the time of the notice, Magna was the holder of outstanding convertible promissory notes of the Company in the aggregate principal amount of approximately $~~1.6 million (excluding all accrued but unpaid interest)~~125, ~~consisting of approximately $0.3 million of Senior Notes and $1.3 million of New Magna Notes, and had entered into agreements with holders of an additional $500,~~000 ~~aggregate~~non-interest ~~principal~~bearing ofpromissory ~~Senior~~note ~~Notes~~payable to ~~acquire such Senior Notes. The default notice demanded repayment of~~ the ~~entire~~then ~~amount~~CEO/sole ~~due~~member ~~under the Senior Notes (including the $500,000~~ of ~~Senior Notes Magna had~~ the ~~right to acquire)~~ ~~and the New Magna Notes (collectively, the "Magna Notes"). The~~ Company ~~did not have the financial resources to repay this indebtedness~~. The ~~default~~CEO/sole ~~notice~~member ~~also~~provided ~~advised~~ the Company ~~and~~funds ~~its~~for ~~subsidiaries~~general ~~that~~operating Magna was exercising all of its rights and remedies under the Senior Notes it owns (including the $500,000 of Senior Notes Magna had the right to acquire) and the New Magna Notes and the related debt documentsexpenses. InThe ~~conjunction~~note ~~with~~matured ~~this~~on ~~default~~April ~~notice~~1, ~~the Company received from Magna a Notification of Disposition of Collateral (the “NDC”). The NDC advised the Company that Magna intended to sell~~2016, ~~lease or license~~however the ~~assets~~note ~~securing~~was ~~the~~extended ~~Senior Notes and the New Magna Notes at a public auction~~ to ~~take~~December place in early November of 2015. These assets constitute substantially all of the assets of the Company and its subsidiaries, except for those assets securing the SNC Note. On November 4, 2015, the public auction took place, and Magna purchased the assets, including the capital stock of the Company’s VAC and PositiveID Animal Health subsidiaries, for $1 ~~million~~, ~~which was credited against the Company’s outstanding indebtedness to Magna~~2017.

~~Magna’s~~On ~~purchase~~February of4, 2016, the Company issued another $~~500~~125,000 ofnon-interest ~~Senior~~bearing ~~Notes~~promissory ~~from~~note ~~the~~payable ~~previous~~to ~~holders~~the ~~was~~CEO/sole ~~completed~~member onof ~~November 10, 2015~~the Company. InThe ~~connection~~CEO/sole ~~with~~member ~~this transaction,~~provided the Company ~~amended~~funds afor ~~previously~~general ~~issued~~operating ~~unsecured~~expenses. ~~convertible~~The ~~promissory~~ note ~~with~~matured ~~one~~on ofMay ~~the~~1, ~~holders~~2016, ~~by increasing~~however the ~~principal~~note ~~amount~~was ofextended ~~the~~to ~~note~~December ~~by $102~~1,~~500.~~ ~~The Company did not receive any cash proceeds from this transaction~~2017.

NOTE 13 – 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 3 – Inputs that are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability.

During the six months ended June 30, 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 six months ended June 30, 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 June 30, 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.

VERITEQ CORPORATION AND SUBSIDIARIES

~~Notes~~CONDENSED toNOTES TO ~~Condensed~~CONSOLIDATED ~~Consolidated~~FINANCIAL ~~Financial Statements (unaudited)~~STATEMENTS

~~September~~ JUNE 30, ~~2015~~2016

~~SNC Assets~~(Unaudited)

The ~~SNC~~following ~~Note~~table ~~(see~~summarizes ~~note~~our 5)financial ~~is secured by all of the~~ assets, ~~consisting primarily of intellectual property~~ and ~~certain~~liabilities ~~tangible property~~measured ~~and~~at ~~equipment~~fair ~~(the~~value ~~“SNC~~as ~~Collateral”),~~presented ~~acquired~~in by the ~~Company~~balance ~~under~~sheets ~~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~~of on June 30, ~~2015~~2016 and ~~has not been repaid~~December 31, 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.thousands):

Proposed Acquisition

	June 30, 2016						December 31, 2015
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3

Liabilities:
Subordinated debt	$	—	$	—	$	263	$	—	$	—	$	—
Bifurcated option in convertible notes	$	—	$	—	$	3,821	$	—	$	—	$	—
Warrant liabilities	$	—	$	—	$	1,582	$	—	$	—	$	—

OnThe ~~November~~following ~~25,~~is ~~2015, the Company entered into~~ a ~~Stock~~summary Purchase Agreement (the “Purchase Agreement”) with The Brace Shop, LLC, a Florida limited liability company (“The Brace Shop”) and Lynne Shapiro (the “Seller”), whereby the Company agreed to acquire (the “Acquisition”), all of ~~the~~activity ~~issued and outstanding membership interests (the “Stock”)~~ of ~~The~~Level ~~Brace~~3 ~~Shop.~~liabilities The Brace Shop operates as an online retailer of orthopedic braces and related medical devices and, according to The Brace Shop’s management, had annual unaudited revenues of approximately $7 million for the ~~year~~six months ended ~~December~~June 3130, ~~2015.~~ 2016:

Pursuant to the terms of the Purchase Agreement, the aggregate purchase price for the Stock is (i) $250,000 in cash, $125,000 of which was paid to the Seller upon the execution of the Purchase Agreement, $62,500 of which was paid to the Seller on January 6, 2016 and the remaining $62,500 was paid to the Seller on February 5, 2016, (ii) one unit of the Company’s to be established Series E Preferred Stock which is convertible into 84.9% of the issued and outstanding shares of common stock of the Company, on a fully diluted basis with voting rights, (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, the Company’s current Chief Executive Officer will receive a unit of the Series E Preferred Stock convertible into 3.9% of the issued and outstanding common stock of the Company on a fully-diluted basis. The units of Series E Preferred Stock and the Goldenshare will not be convertible until the date six months from the date of the closing of the Acquisition. In addition, upon the closing of the Acquisition, pursuant to the Purchase Agreement, the Company 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 of the Company, which warrant may be exercisable on a cashless basis.

	SNC Note		Bifurcated embedded option in convertible notes			Warrant liabilities
Balance at December 31, 2015	$	-	$	-		$	-
Recapitalization		249		3,842			1,439
Issuance of additional debt				88			206
Conversion of notes into share of common stock
Losses (gains) included in net loss		14		(109	)		(63	)
Balance at June 30, 2016	$	263	$	3,821		$	1,582

~~The aggregate cash payment of $250,000~~NOTE to14 ~~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 CompanySTOCKHOLDERS’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.DEFICIT

~~The~~Preferred 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.Stock

~~The closing~~As part of the ~~Acquisition~~recapitalization isof ~~subject~~equity related to athe ~~number~~May ~~of other conditions including~~6, ~~but~~2016 ~~not~~acquisition described ~~limited~~in toNote 1, the Company ~~becoming~~has ~~current in~~authorized ~~its~~5 ~~reporting~~million ~~requirements~~shares ~~under~~of ~~the~~preferred ~~Federal~~stock, ~~Securities~~par ~~Laws~~value $0.01 per share, and ~~completion~~assumed 1,400 shares of anSeries ~~audit~~D Preferred Stock outstanding presented as temporary equity of ~~The~~$1,400,000 ~~Brace~~and ~~Shop’s~~is ~~financial~~deemed to have issued 39 shares ~~statements~~of ~~for~~Series ~~its~~E ~~two~~preferred ~~most~~stock ~~recent~~to ~~fiscal~~the ~~years~~original shareholders of Veriteq Corp. ~~Since~~In addition, the ~~sole~~Company ~~member~~had 849 shares of ~~The~~Series ~~Brace~~E preferred ~~Shop~~stock ~~would~~outstanding. ~~obtain~~In ~~voting~~total ~~control~~888 shares of 84the Series E stock is convertible into 88.98% of the ~~Company~~issued and outstanding Common Stock on a fully-diluted basis, however it is not convertible until the ~~Company~~six ~~anticipates~~(6) ~~that~~month anniversary of the closing of the transaction. ~~Acquisition~~Further, ifonce ita ~~takes~~majority ~~place,~~of ~~will~~the ~~result~~outstanding inSeries aE ~~change~~Preferred inStock ~~control~~has been converted into common stock, then any ~~and~~other ~~therefore~~Series ~~would~~E bePreferred ~~accounted~~Stock ~~for~~then asoutstanding ashall ~~reverse~~automatically ~~acquisition~~be ~~and~~deemed ~~recapitalization~~converted ~~with~~into common stock on the ~~Brace~~fifth ~~Shop~~business day asfollowing the ~~accounting~~date ~~acquirer and~~that ~~continuing~~a ~~business~~majority of the ~~Company~~outstanding Series E Preferred Stock is converted into common stock.

~~While~~Common the Company currently believes that the closing of the Acquisition will take place in March of 2016, there can be no assurances that the Closing will occur during such time or at all, or that the terms of the Acquisition as set forth in the Purchase Agreement will not materially change. Moreover, the Company currently has limited funds and no assurances can be given that it will be able to raise any additional funds on terms acceptable to the Company, or at all, or that the Company will be able to continue as a going concern. The failure to do so could result in the Company not being able to effectuate the AcquisitionStock

As part of the recapitalization of equity related to the May 6, 2016 reverse acquisition described in Note 1, the Company has authorized 100 billion shares of common stock, par value $0.00001 per share, and is deemed to have issued 965,635 common shares to the original shareholders of Veriteq Corp.

Warrants Deemed as Liabilities

As part of the recapitalization of equity related to the May 6, 2016 reverse acquisition described in Note 1, the Company assumed $1,439,130 of warrant liabilities at fair value as of May 6, 2016. The Company issued warrants in connection with a debt financing with an initial fair value of $206,324 in June 2016. The Company recognized a change in fair value of warrant liabilities of income of $63,014 related to the fair value of the warrant liabilities for the period ended June 30, 2016. As of June 30, 2016 the balance of the warrant liability was $1,582,440.

VERITEQ CORPORATION AND SUBSIDIARIES

~~ITEM~~CONDENSED ~~2. MANAGEMENT’S DISCUSSION~~NOTES ~~AND~~TO ~~ANALYSIS~~CONSOLIDATED OF FINANCIAL ~~CONDITION AND RESULTS OF OPERATIONS~~STATEMENTS

~~The following~~JUNE ~~discussion should be read in conjunction with the information contained in our unaudited consolidated financial statements and notes thereto appearing elsewhere herein~~30, ~~and in conjunction with the Management’s Discussion and Analysis set forth in our fiscal 2014 Annual Report on Form 10-K.~~ 2016

~~OVERVIEW~~(Unaudited)

~~Our~~Stock ~~Business~~Options and Restricted Stock

WeIn ~~were~~accordance ~~previously~~with ~~engaged in~~ the ~~business~~Compensation of– ~~radio~~Stock ~~frequency~~Compensation ~~identification~~Topic ~~technologies~~of ~~(“RFID”) for~~ the ~~Unique~~Codification, ~~Device Identification~~awards ~~(“UDI”)~~ of ~~implantable~~stock ~~medical~~options ~~devices~~are ~~and,~~recorded ~~subject to funds becoming available, radiation dose measurement~~at ~~technologies~~fair ~~for~~value ~~use~~on inthe ~~radiation~~date ~~therapy~~of ~~treatment.~~grant ~~From inception through September 30, 2015, we generated minimal sales revenue~~ and ~~our~~compensation ~~operations~~cost ~~were~~is ~~subject~~recognized toon ~~all the risks inherent in the establishment of~~ a ~~new~~straight ~~business~~line ~~enterprise.~~basis ~~Our~~over ~~failure to timely file our Quarterly Report on Form 10-Q with~~ the ~~SEC~~service inperiod ~~August~~ of ~~2015,~~each ~~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~~award.~~0 million~~ ofUpon ~~senior~~exercise ~~secured promissory notes secured by substantially all~~ of ~~our~~stock ~~assets~~options, ~~comprised~~the ~~primarily~~Company’s ofpolicy ~~intellectual~~is ~~property related~~ to ~~UDI~~issue ofnew ~~implantable~~shares ~~medical~~from ~~devices,~~its ~~and~~authorized ~~$1.3~~but ofunissued ~~million~~balance ~~convertible promissory~~ of common ~~notes~~stock outstanding that ~~were~~have ~~pari~~been ~~passu~~reserved infor ~~rank~~issuance ~~and~~under ~~priority to~~ the ~~senior~~Company’s ~~secured~~stock ~~promissory~~option ~~notes (collectively, the "Senior Notes”)~~plans.

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 of 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.

	Options		Weighted average
	Quantity		exercise price
Options outstanding as of December 31, 2015		-	$	-
Options assumed in reverse acquisition		123,500,000		0.036
Options granted		-		-
Options exercised		-		-
Forfeitures		-		-
Options outstanding as of June 30, 2016		123,500,000	$	0.036

~~In October of 2015, we contacted the holder of a subordinated~~NOTE ~~convertible~~15 ~~promissory~~– ~~note~~SUBSEQUENT (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.EVENTS

~~Although~~Senior weSecured ~~still~~Credit ~~have~~Facility a substantial amount of outstanding indebtedness in the form of senior and subordinated convertible notes, we currently intend to attempt to acquire, merge or combine with and/or acquire operating assets of an operating business. On November 24, 2015, as more fully described in note 12 to the accompanying consolidated financial statements, we entered into a Stock Purchase Agreement ~~with The Brace Shop, LLC, a Florida limited liability company (“The Brace Shop”)~~ and ~~Lynne~~Convertible ~~Shapiro~~Promissory (the “Seller”), whereby we agreed to acquire (the “Acquisition”), all of the issued and outstanding membership interests of The Brace Shop. The Brace Shop operates as an online retailer of orthopedic braces and related medical devices and, according to The Brace Shop’s management, had annual unaudited revenues of approximately $7 million for the year ended December 31, 2015.Note

~~The~~On September ~~closing~~30, 2016 with an effective date of ~~the~~November ~~Acquisition~~10, is2016 ~~subject~~the toCompany executed a ~~number~~Senior ofSecured Credit Facility Agreement ~~conditions~~(the ~~including~~“Agreement”) by and among: (i) the Company; (ii) BRACE SHOP, ~~but~~LLC, ~~not~~a limited toliability company organized under the laws of the State of Florida, ~~our~~BRACESHOP ~~becoming~~REAL ~~current~~ESTATE inHOLDINGS, ~~our~~LLC, ~~reporting~~a ~~requirements~~Florida ~~under~~limited ~~the~~liability ~~Federal~~company ~~Securities~~(each ~~Laws~~individually, a “Corporate Guarantor” and ~~completion~~collectively, ofthe an“Corporate ~~audit~~Guarantors”); (iii) any Person to hereafter become a Subsidiary of ~~The~~the ~~Brace~~Borrower ~~Shop’s~~as ~~financial~~defined, ~~statements~~and ~~for~~any ~~its~~Person ~~two~~that ~~most~~from ~~recent~~time ~~fiscal~~to ~~years.~~time ~~While~~may wehereafter ~~currently believe~~become ~~that~~liable for the ~~closing~~Obligations, or ofany part thereof, as joint and several guarantors (the ~~Acquisition~~“Additional ~~will~~Guarantors”) ~~take~~(the ~~place~~Corporate inGuarantors ~~March~~and ofthe Additional ~~2016~~Guarantors, ~~there~~together, ~~can~~jointly beand noseverally, ~~assurances~~the ~~that~~“Guarantors” and together with the ~~closing~~Borrower, ~~will~~the “Credit ~~occur~~Parties”); ~~during~~and ~~such~~(iv) ~~time~~TCA orGLOBAL atCREDIT ~~all.~~MASTER ~~Moreover~~FUND, weLP, ~~currently~~a ~~have~~ limited ~~funds~~partnership organized and noexisting ~~assurances~~under ~~can~~the belaws ~~given~~of ~~that~~the Cayman weIslands, ~~will~~as belender ~~able to~~(the ~~raise~~“Lender”). ~~any~~The ~~additional~~Lender ~~funds~~extended ona ~~terms~~senior ~~acceptable~~secured credit facility to ~~us,~~the orCompany atof ~~all~~up to One Million and No/100 United States Dollars (US$1,000,000.00) orfor ~~that~~working wecapital ~~will~~financing befor ~~able~~the toCompany ~~continue~~and asits aSubsidiary, and ~~going~~for ~~concern~~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.

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 are fully secured under the loan documents and have 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.

VERITEQ CORPORATION AND SUBSIDIARIES

~~Reverse~~CONDENSED NOTES ~~Stock~~TO ~~Splits~~CONSOLIDATED FINANCIAL STATEMENTS

OnJUNE ~~February 11~~30, 2015, an amendment to our Amended and Restated Certificate of Incorporation became effective to implement a 1-for-1,000 reverse split (the “February 2015 Reverse Stock Split”) of our outstanding common stock, whereby each 1,000 shares of the Company’s issued and outstanding common stock was automatically, and without any action on the part of the respective holders, combined and converted into one issued and outstanding share of common stock. On July 29, 2015, another amendment to our Amended and Restated Certificate of Incorporation became effective to implement a 1-for-10,000 reverse stock split (the “July 2015 Reverse Stock Split” and, together with the February 2015 Reverse Stock Split, the “2015 Reverse Stock Splits”) of the Company’s common stock. As a result, each 10,000 shares of the Company’s issued and outstanding common stock automatically, and without any action on the part of the respective holders, were combined and converted into one issued and outstanding share of common stock. The 2015 Reverse Stock Splits affected all issued and outstanding shares of our common stock, as well as all common stock underlying stock options, warrants, convertible notes and convertible preferred stock outstanding immediately prior to the 2015 Reverse Stock Splits. The February 2015 Reverse Stock Split was authorized by our Board of Directors, and by our Stockholders at the 2014 Annual Meeting of Stockholders held on December 18, 2014. The July amendment to our Amended and Restated Certificate of Incorporation also increased the number of common shares that we are authorized to issue from 10 billion to 100 billion and, along with the July 2015 Reverse Stock Split, was approved by our Board of Directors and ratified by our stockholders on May 26, 2015.2016

No fractional shares were issued as a result of the 2015 Reverse Stock Splits and stockholders who otherwise would have been entitled to a fractional share received or will receive, in lieu thereof, a cash payment equal to the value of the fractional share to which the stockholder would otherwise be entitled based on the per share closing sales price of the Company’s common stock on the effective date of the 2015 Reverse Stock Splits. All share, per share and capital stock amounts as of September 30, 2015, December 31, 2014 and for the three and nine months ended September 30, 2015 and 2014 have been restated to give effect to the 2015 Reverse Stock Splits.(Unaudited)

~~CRITICAL~~Promissory ~~ACCOUNTING POLICIES AND ESTIMATES~~Notes

~~Our~~On ~~discussion~~July ~~and~~1, ~~analysis~~2016 ofthe ~~financial~~Company ~~condition~~issued ~~and~~a ~~results~~promissory note with a principal balance of ~~operations~~$103,664 ~~are~~and ~~based~~an ~~upon~~original ~~our~~issue ~~consolidated~~discount ~~financial~~of ~~statements~~$6,664. ~~which~~The ~~have~~terms ~~been~~of ~~prepared~~repayment inrequire ~~accordance~~the ~~with~~Company ~~accounting~~to ~~principles~~make ~~generally~~aggregate ~~accepted~~payments inof ~~the~~not ~~United~~less ~~States~~than 10% of ~~America~~the ~~(“U.S.~~principal balance every 90 days ~~GAAP”).~~beginning ~~The~~at ~~preparation~~the end of ~~these~~the ~~financial~~cancellation ~~statements~~period ~~requires~~(the usthird tocalendar ~~make~~day ~~estimates~~after ~~and~~funding ~~judgments~~was ~~that~~received) ~~affect~~and ending when the ~~reported~~principal ~~amounts~~amount ofhas ~~assets,~~been ~~liabilities,~~paid ~~revenues~~in ~~and~~full ~~expenses,~~or ~~and~~540 ~~the~~days ~~related~~after ~~disclosure~~the end of ~~contingent~~the ~~liabilities.~~cancellation Weperiod, ~~base~~whichever ~~these~~first ~~estimates on~~occurs. ~~our~~The ~~historical~~debt ~~experience~~discount ~~and~~will be onamortized ~~various~~over ~~other~~the ~~assumptions~~term ~~that~~of wethe ~~believe~~note. toThis benote ~~reasonable~~is ~~under~~collateralized by the ~~circumstances~~Company’s PayPal account, ~~and~~any ~~these estimates~~other ~~form~~PayPal account of the ~~basis~~Company ~~for~~and ~~our~~all ~~judgments~~balances ~~concerning~~in ~~the~~such ~~carrying~~PayPal ~~values~~accounts, ofall ~~assets~~general ~~and~~intangibles ~~liabilities~~defined ~~that~~in ~~are~~Article ~~not~~9 ~~readily~~of ~~apparent~~the Uniform Commercial ~~from~~Code ~~other~~as ~~sources.~~in Weeffect ~~periodically~~in ~~evaluate~~the ~~these~~state ~~estimates~~of ~~and~~Utah, ~~judgments~~all ~~based~~payment onintangibles, ~~available~~all ~~information~~rights to payment and ~~experience.~~other ~~Actual~~rights of the Company in connection ~~results~~with ~~could~~the ~~differ~~Company’s ~~from~~PayPal ~~our~~account ~~estimates~~or ~~under~~any ~~different~~other ~~assumptions~~PayPal ~~and~~account ~~conditions.~~of Ifthe ~~actual~~Company ~~results~~including ~~significantly~~all ~~differ~~monies, ~~from~~cash equivalents, and ~~our~~all ~~estimates~~proceeds and products , ~~our~~whether ~~financial~~tangible ~~condition~~or ~~and~~intangible ~~results~~related ofto ~~operations~~the ~~could~~PayPal beaccounts ~~materially~~mentioned ~~impacted~~above.

WeLoan have identified the policies and significant estimation processes discussed below as critical to our business operations and to the understanding of our results of operations. For a detailed discussion on the application of these and other accounting policies, see Note 2 to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2014.Agreement

~~Use~~On October 1, 2016 (Execution Date) the Company executed a loan agreement with a third party (Lender) the terms of ~~Estimates~~ 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; 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.

~~The~~SNC preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Although these estimates are based on the knowledge of current events and actions we may undertake in the future, they may ultimately differ from actual results. Included in these estimates are assumptions used in: (i) determining the lives and valuation of long-lived assets; (ii) valuation models used in determining the value of certain derivative financial instruments, warrant liabilities and the fair value of a promissory note with an embedded conversion option; (iii) determining valuation allowances for deferred tax assets and (iv) stock-based compensation.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.

Convertible Notes

On August 16, 2016 the Company issued a convertible promissory note with a principal amount of $52,500 for which the Company received $50,000 in proceeds net of original issue discount of $2,500. 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. 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.

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

~~Derivative~~ITEM ~~Financial~~2. ~~Instruments~~MANAGEMENT’S ~~and~~DISCUSSION ~~Fair~~AND ~~Value~~ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

WeThis ~~account~~Quarterly ~~for~~Report ~~notes~~on ~~payable~~Form ~~that~~10-Q ~~are~~contains ~~convertible~~forward-looking ~~into~~statements ~~shares~~within of the ~~Company’s~~meaning ~~common~~of ~~stock~~the ~~and~~federal ~~warrants~~securities ~~issued~~laws. ~~in conjunction~~These ~~with~~include ~~the~~statements ~~issuance~~about ofour ~~such~~expectations, ~~notes~~beliefs, inintentions ~~accordance~~or ~~with~~strategies for the ~~guidance~~future, ~~contained~~which inwe ~~the~~indicate ~~Financial~~by ~~Accounting~~words ~~Standards Board (“FASB”)~~or ~~Accounting~~phrases ~~Standards~~such ~~Codification~~as (“~~ASC~~anticipate,”) ~~Topic 815~~“expect,” ~~Derivatives and Hedging (~~“~~ASC~~intend,” ~~815~~“plan,”) ~~and ASC~~“will,” ~~Topic~~“we ~~480~~believe,” ~~Distinguishing Liabilities From Equity (~~“~~ASC~~management ~~480~~believes”). ~~For warrant instruments~~ and ~~conversion~~similar ~~options embedded~~language. inExcept ~~promissory~~for ~~notes~~the ~~that~~historical ~~are~~information contained ~~not~~herein, ~~deemed~~the tomatters bediscussed ~~indexed~~in tothis ~~the Company~~“Management’s ~~own~~Discussion ~~stock,~~and weAnalysis ~~classify~~of ~~such~~Financial ~~instruments~~Condition and asResults ~~liabilities~~of atOperations,” ~~their~~and ~~fair~~elsewhere ~~values~~in atthis ~~the~~quarterly ~~time~~report ofare ~~issuance~~forward-looking ~~and~~statements ~~adjust~~that ~~the~~involve ~~instruments~~risks toand uncertainties. ~~fair~~The ~~value~~factors atlisted ~~each~~in ~~reporting~~the ~~period. These~~section ~~liabilities~~captioned “Risk Factors,” as well as aany ~~convertible~~cautionary ~~note~~language ~~that~~in this wequarterly ~~elected~~report, toprovide ~~account~~examples ~~for~~of ~~at fair value~~risks, ~~are~~uncertainties ~~subject~~and toevents ~~re-measurement~~that ~~at each~~may ~~balance~~cause ~~sheet~~our ~~date~~actual ~~until~~results ~~extinguished~~to ~~either~~differ materially ~~through~~from ~~conversion~~those orprojected. ~~exercise,~~Except ~~and~~as ~~any~~may ~~change~~be inrequired ~~fair~~by ~~value~~law, iswe ~~recognized~~undertake ~~in our~~no ~~statement~~obligation ofto ~~operations.~~update ~~The~~any ~~fair~~forward-looking statement ~~values~~to ofreflect ~~these~~events ~~derivative~~after ~~and~~the ~~other~~date ~~financial~~of ~~instruments~~this ~~have~~quarterly ~~been estimated using Monte Carlo simulations and other valuation techniques~~report.

~~Revenue~~Brace ~~Recognition~~ 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.

WeAt ~~recognize~~the ~~revenue~~closing atof the ~~time~~Reverse ~~product is shipped and title has transferred~~Merger, ~~provided~~Scott ~~that~~Silverman aresigned ~~purchase~~as ~~order~~Chairman ~~has~~of ~~been~~our ~~received~~Board ~~or a~~of ~~contract has been executed~~Directors, ~~there~~Shawn ~~are~~Wooden noresigned ~~uncertainties~~as ~~regarding~~a member ~~customer~~of ~~acceptance,~~ the ~~sales~~Board ~~price~~of isDirectors ~~fixed~~ and ~~determinable and~~we ~~collectability~~elected ~~is deemed probable~~Mrs. ~~Our~~Lynne ~~revenue~~Shapiro ~~results~~as ~~are~~a ~~difficult~~member toof ~~predict,~~the ~~and~~Board ~~any~~of ~~shortfall in revenue or delay in recognizing revenue could cause our operating results to vary significantly from quarter to quarter and year to year~~Directors.

~~Income~~As ~~Taxes~~ 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.

WeThe ~~have~~following ~~adopted~~discussion ~~Accounting~~highlights ~~Standards~~the ~~Codification~~results ~~subtopic~~of ~~740-10,~~operations ~~Income~~of ~~Taxes,~~Veriteq ~~(“ASC~~Corp. ~~740-10”),~~and ~~which~~its ~~requires the~~wholly-owned ~~recognition~~subsidiary ofBrace ~~deferred~~Shop ~~tax liabilities~~ and ~~assets~~its affiliate ~~for~~Braceshop ~~the~~Real ~~expected~~Estate ~~future~~Holdings ~~tax~~and ~~consequences~~the ofprincipal ~~events~~factors that have ~~been~~affected ~~recognized in~~its ~~our~~ financial ~~statements.~~condition ~~Under~~as ~~this~~well ~~method,~~as ~~deferred~~its ~~tax liabilities~~ liquidity and ~~assets~~capital ~~are~~resources ~~determined~~ for ~~temporary differences between~~ the ~~financial~~periods ~~statement~~described, and ~~tax~~provides ~~bases~~information ~~of assets and liabilities~~ that ~~will~~management ~~result~~believes inis ~~future~~relevant ~~taxable~~for oran ~~deductible amounts, based~~assessment ~~on enacted tax laws~~ and ~~rates~~understanding inof ~~effect for~~ the ~~year~~financial incondition ~~which~~and ~~the~~results ~~differences~~of ~~are~~operations ~~expected~~presented ~~to affect taxable income~~herein. ~~Temporary differences~~The ~~between~~following ~~taxable~~discussion ~~income reported for financial reporting purposes~~ and ~~income~~analysis is ~~tax~~based ~~purposes~~on ~~consist~~the ~~primarily~~unaudited ofconsolidated ~~timing differences,~~financial ~~such~~statements ascontained ~~amortization~~in ofthis ~~intangible~~Quarterly ~~assets~~Report, ~~deferred~~ ~~officers'~~which ~~compensation~~has ~~and~~been ~~stock-based~~prepared ~~compensation.~~in ~~A valuation~~accordance ~~allowance~~with isgenerally ~~provided~~accepted ~~against~~accounting ~~net~~principles ~~deferred~~in ~~tax~~the ~~assets~~United ~~when~~States. weYou ~~determine~~should ~~that~~read itthe isdiscussion ~~more~~and ~~likely~~analysis ~~than~~together ~~not that we will fail to generate~~with ~~sufficient~~such ~~taxable~~consolidated ~~income~~financial tostatements beand ~~able to utilize~~ the ~~deferred~~related ~~tax~~notes ~~assets~~thereto.

~~RESULTS~~Basis OFof ~~OPERATIONS~~Presentation

~~Three~~The ~~Months~~unaudited ~~Ended~~consolidated ~~September~~financial statements for the three and six months ended June 30, 2016 and 2015 ~~Compared~~include toa ~~Three~~summary ~~Months~~of ~~Ended~~our significant ~~September~~accounting 30policies and should be read in conjunction with the discussion below. In the opinion of management, ~~2014~~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.

Revenue and Gross Profit

Revenues for the three months ended September 30, 2015, our fiscal third quarter, were $4,000, as compared to $44,000 for the three months ended September 30, 2014. The decrease is due to EL accepting a high volume order at a one-time price discount in the second quarter of 2015 to assist with our liquidity difficulties, resulting in reduced sales in the third quarter of 2015. Gross profit for the three months ended September 30, 2015 was nil, as compared to $33,000 for the same period of a year ago.

Selling, General and Administrative Expenses

Selling, general and administrative expenses, including development expenses, (“SG&A”) were approximately $7.0 million for the three months ended September 30, 2015, as compared to $1.5 million for the three months ended September 30, 2014. The increase is mainly due to $6.2 million of stock-based compensation expense in 2015, as compared to $0.2 million in 2014. During the three months ended September 30, 2015, we granted 250,000,000 shares of restricted common stock to certain of our officers and directors which vest on January 2, 2017 or upon a change in control, and we granted options to purchase 148,500,000 shares of common stock to employees which vested on the date of grant.

Depreciation and Amortization Expense

We incurred depreciation and amortization expense of $29,000 and $150,000 for the three months ended September 30, 2015 and 2014, respectively. The decrease is due to lower amortization expense related to intangible assets, as we recognized an impairment and lowered the carrying value of our intangible assets by $5.0 million in the fourth quarter of 2014.

VERITEQ CORPORATION AND SUBSIDIARIES

~~Operating~~Results ~~Loss~~of Operations

~~Our~~Three ~~operating loss was $7.0 million~~ and ~~$1.7~~six ~~million for the three~~ months ended ~~September~~June 30, ~~2015~~2016 ~~and~~compared ~~2014,~~to ~~respectively.~~the ~~The~~three ~~increased operating~~and ~~loss~~six ~~was~~months ~~due~~ended toJune ~~the~~30, ~~increase in stock-based compensation expense.~~2015

~~Interest~~The ~~Expense~~following table sets forth our revenues, expenses and net loss for the three and six months ended June 30, 2016 and 2015. The financial information below is derived from our unaudited consolidated financial statements included as an exhibit to this Quarterly Report.

Interest expense was $0.9 million and $0.5 million for the three months ended September 30, 2015 and 2014, respectively. During the three months ended September 30, 2015, we recorded a non-cash interest charge of approximately $0.5 million due to increases in the principal amount of our outstanding convertible notes resulting from the events of default that took place during the quarter, in accordance with the terms of the notes. The remainder of our interest expense in both periods is primarily comprised of the amortization of debt discounts. The discounts on our debt are largely the result of the initial fair value recognized for the embedded conversion options contained in the convertible promissory notes we issue to fund our operations and, to a lesser extent, original issue discount on these notes, which result in a reduction of net proceeds to us.

	For the Three Ended June 30,						For the Six Ended June 30,
	2016			2015			2016			2015
Revenue
Retail Sales	$	1,801,375		$	1,674,505		$	3,484,999		$	3,373,257

Total Revenue	$	1,801,375		$	1,674,505		$	3,484,999		$	3,373,257

Cost of Retail Sales	$	(1,191,470	)	$	(1,081,849	)	$	(2,271,406	)	$	(2,186,229	)
Gross Profit	$	609,905		$	592,656		$	1,213,593		$	1,187,028

Operating Expenses:
General and Administrative	$	197,251		$	54,481		$	(336,035	)	$	(117,289	)
Marketing and Promotion	$	305,633		$	338,517		$	(653,504	)	$	(684,211	)
Payroll Expenses	$	237,206		$	232,146		$	(468,745	)	$	(405,922	)
Credit Card Processing	$	71,644		$	68,600		$	(129,328	)	$	(129,391	)
Total Operating Expenses	$	811,734		$	693,744		$	(1,587,612	)	$	(1,336,813	)

Loss from Operations	$	(201,829	)	$	(101,088	)	$	(374,019	)	$	(149,785	)
Other Income and Expense:
Other Income (Expense)	$	303,080		$	0		$	156,021		$	0
Sublease Income	$	5,508		$	2,125		$	11,370		$	3,250
Change in fair value of derivative and other fair valued instruments, net	$	158,108		$	0		$	158,108		$	0
Interest Expense	$	(181,832	)	$	(12,807	)	$	(387,387	)	$	(25,135	)

Total Other Income (Expense)	$	284,864		$	(10,682	)	$	(61,888	)	$	(21,885	)

Net Loss	$	83,035		$	(111,770	)	$	(435,907	)	$	(171,670	)

~~Change in Value of Derivative and other Fair Valued Instruments~~Revenues

~~During~~The ~~the~~Company’s ~~three~~revenues ~~months~~were ~~ended~~$1,801,375 ~~September~~and 30$1, ~~2015~~674,505 wefor ~~recognized a loss on~~ the ~~change~~three inmonths ~~fair~~ending ~~value~~June of30, ~~derivative~~2016 and ~~other~~2015, ~~fair~~respectively. ~~valued~~This ~~instruments~~increase ofwas ~~$4.2~~primarily ~~million,~~ due to ~~increases~~revenue inearned ~~the~~related ~~fair~~to ~~value~~product offulfillment. ~~the~~The ~~SNC~~Company’s ~~Note,~~revenues ~~conversion~~were ~~options embedded in convertible notes and warrant liabilities in the amounts of~~ $~~0.2 million~~3,484,999 ~~$4.0 million~~ and $243,~~000~~373,257 ~~respectively.~~for ~~For~~ the ~~three~~six months ~~ended~~ending ~~September~~ June 30, ~~2014,~~2016 ~~we recorded losses related to changes in the fair value of the SNC Note~~ and ~~conversion options embedded in convertible notes in the amount of $0.1 million and $0.2 million~~2015, respectively,. ~~and~~This aincrease ~~gain~~was onprimarily ~~the~~due ~~change~~to inrevenue ~~fair~~earned ~~value of warrant liabilities~~related into ~~the~~product ~~amount of $1~~fulfillment.~~5 million.~~

We believe that the embedded conversion options within outstanding notes payable, the SNC Note and the outstanding warrant liabilities could continue to result in significant fluctuations to our results of operations, as these instruments, or securities with similar terms that we may issue in the future, require a determination of fair value in each reporting period, and changes in these fair values are required to be recognized through our statement of operations.

Net Loss

Our net loss was $12.1 million for the three months ended September 30, 2015, as compared to $0.9 million for the three months ended September 30, 2014. The difference is mainly due to the increase in stock-based compensation in 2015, and the net loss on the change in fair value of derivative and other fair valued instruments of $4.2 million in 2015, as compared to a net gain of $1.3 million in 2014.

Nine Months Ended September 30, 2015 Compared to Nine Months Ended September 30, 2014

Revenue and Gross Profit

Revenues for the nine months ended September 30, 2015 were $0.3 million, as compared to $0.1 million for the nine months ended September 30, 2014. The increase is due to an increase in the number of microtransponder units shipped to EL as a result of increased sales by EL of breast implants containing our microtransponders.

Gross profit for the nine months ended September 30, 2015 was $163,000, as compared to $82,000 for the same period of a year ago. Our gross margin for the first nine months of 2015 was 56.8%, as compared with 59.0% for the first nine months of 2014. The decrease was due to the one-time volume discount provided to EL in the second quarter of 2015.

Selling, General and Administrative Expenses

SG&A was approximately $8.9 million for the nine months ended September 30, 2015, as compared to $4.1 million for the nine months ended September 30, 2014. The increase is mainly due to a $5.7 million increase in stock-based compensation in 2015 due to the stock option and restricted common stock grants in August of 2015, partially offset by and a $0.7 million decrease in legal, consulting and professional fees, including investor relations expenses.

VERITEQ CORPORATION AND SUBSIDIARIES

~~Asset~~Cost ~~Impairment~~of ~~Charge~~Revenue

AtOur cost of revenue increased by $109,621, or 10%, during the three months ending June 30, ~~2015~~2016, weto ~~determined~~$1,191,470, ~~that~~from $1,081,849 in cost of goods sold for the ~~carrying~~three ~~value~~months ended June 30, 2015. The increase in cost of ~~the~~goods ~~intangible~~sold ~~assets~~was directly related to ~~our~~the ~~RFID~~increase in ~~technology~~sales ~~exceeded~~resulting ~~their~~in ~~fair value~~higher product costs and shipping costs. AsOur acost ~~result~~of revenue increased by $85,177, weor ~~recorded~~14, anduring ~~impairment~~the ~~charge~~six months ofending June 30, 2016, to $~~0.4~~2,271,406, ~~million~~from $2,186,229 in cost of goods sold for the ~~nine~~six months ended ~~September~~June 30, 2015. toThe increase ~~write~~in ~~these assets~~cost ~~down~~of togoods ~~their~~sold ~~fair~~was ~~value,~~directly ~~with~~related noto ~~comparable~~the ~~amount~~increase ~~for~~in ~~the~~sales ~~nine~~resulting ~~months~~in ~~ended~~higher ~~September~~product ~~30,~~costs ~~2014~~and shipping costs.

~~Depreciation~~Operating ~~and Amortization Expense~~Expenses

WeTotal ~~incurred~~operating ~~depreciation~~expenses were $811,734 and ~~amortization~~$693,744 ~~expense~~for ofthe ~~$0.1~~three ~~million~~months ending June 30, 2016 and $02015, respectively.4 ~~million~~This ~~for~~increase is primarily due to the ~~first~~Company ~~nine~~incurring ~~months~~higher professional fees and payroll expenses in 2016 resulting partially from the costs of ~~2015~~the reverse acquisition and ~~2014,~~costs ~~respectively~~of maintaining public company status. Total operating expenses were $1,587,612 and $1,336,813 ~~The~~for ~~decrease~~the issix ~~due~~months toending ~~lower~~June ~~amortization~~30, ~~expense~~2016 ~~related~~and to2015, ~~intangible~~respectively. ~~assets~~This increase is primarily due to the ~~impairment~~Company ~~charge~~incurring higher professional fees and ~~corresponding reduction~~payroll expenses in ~~carrying~~2016 ~~value~~resulting ofpartially ~~our~~from ~~intangible~~the ~~assets~~costs ~~recognized~~of in the ~~fourth~~reverse ~~quarter~~acquisition and costs of ~~2014~~maintaining public company status.

~~Operating~~ Loss from Operations

~~Our~~We ~~operating~~reported a loss ~~was~~from operations of $~~9.3~~201,829 ~~million~~for ~~and~~the ~~$4.5~~three ~~million~~months ended June 30, 2016, as compared to a loss from operations of $101,088 for the ~~nine~~three months ended ~~September~~June 30, 2015, ~~and~~which ~~2014~~represents an increase of $100,714, ~~respectively.~~100%, ~~The~~for ~~increased~~the three months ended ~~operating~~June 30, 2016. We reported a loss ~~was~~from ~~mainly~~operations ~~due~~of $374,019 for the six months ended June 30, 2016, as compared to a loss from operations of $149,785 for the six months ended June 30, 2015, which represents an increase inof ~~SG&A~~$224,234, 150%, for the six months ended June 30, 2016.

~~Interest~~Other ~~Expense~~Income (Expenses)

Total other income, net of other expense, was $284,864 for the three months ended June 30, 2016, compared to other expense, net of other income of $10,682 for the three months ended June 30, 2015. Interest expense was $181,832 for the three months ended June 30, 2016 as compared to interest expense of $12,807 for the three months ended June 30, 2015, which is due to the assumption of convertible notes originally on the balance sheet of Veriteq Corp. related to the reverse acquisition. Other income was $1303,080 and $0 for the three months ended June 30, 2016 and 2015, respectively.6 ~~million~~Other income items related primarily to the reversal of $294,117 in guaranteed liability that was effectuated by the Reverse Merger and $158,108 related to the change in fair value of derivative and other fair valued instruments. Sublease income was $5,508 for the three months ended June 30, 2016, compared to $2,125 for the three months ended June 30, 2015.1 ~~million~~Total other expense, net of other income, was $61,888 for the ~~first~~six ~~nine~~months ended June 30, 2016, compared to other expense, net of other income of $21,855 for the six months ended June 30, 2015. Interest expense was $387,387 for the six months ended June 30, 2016 as compared to interest expense of $25,135 for the six months ended June 30, 2015, which is due to the assumption of convertible notes originally on the balance sheet of Veriteq Corp. related to the reverse acquisition. Other income was $156,021 and ~~2014~~$0 for the six months ended June 30, 2016 and 2015, respectively. ~~Most~~Other income related primarily to the reversal in the second quarter of ~~our~~$294,117 ~~interest~~in guaranteed liability that was effectuated by the Reverse Merger offset by a guarantee expense of $147,059 in the ~~both~~first ~~periods~~quarter isand ~~due~~$158,108 related to the ~~amortization~~change in fair value of derivative and other fair valued instruments. Also the Company repaid notes payable in the six months ended June 30, 2016 and received a discount for the prepayment resulting in a gain on extinguishment of debt ~~discounts~~of $8,963 which was included in other income. Sublease income was $11,370 for the six months ended June 30, 2016, compared to $3,250 for the six months ended June 30, 2015.

~~Change~~Net inIncome ~~Value of Derivative and other Fair Valued Instruments~~(Loss)

~~During~~Net income for the ~~nine~~three months ended ~~September~~June 30, ~~2015~~2016 was $83,035 wecompared ~~recognized~~to a net loss onof ~~the~~$111,770 ~~change~~for same period in ~~fair~~2015. ~~value~~The ofnet income ~~derivative~~was ~~and~~primarily ~~other~~attributable ~~fair~~to ~~valued instruments~~the reversal of $~~6.8 million~~294,117 ~~mainly due to an increase~~ in ~~the~~guaranteed ~~fair~~liability ~~values~~that ofwas ~~conversion~~effectuated ~~options~~by ~~embedded~~the inReverse ~~convertible notes~~Merger and ~~warrant~~$158,108 ~~liabilities.~~in ~~For~~change ~~the~~in ~~nine~~fair ~~months~~value ~~ended~~of ~~September~~derivative ~~30,~~and ~~2014,~~other wefair ~~recorded~~valued ~~gains~~instruments. ~~related~~Net toloss ~~changes~~for in the ~~fair~~six ~~value of~~months ~~the~~ended ~~SNC~~June ~~Note~~30, 2016 ~~and~~was ~~conversion~~$435,907 ~~options~~compared ~~embedded~~to ina ~~convertible~~net ~~notes~~loss ~~in the amount~~ of $~~2.7~~171,670 ~~million~~for ~~and~~same ~~$3.4~~period ~~million,~~in ~~respectively, partially~~2015. ~~offset~~The bynet a loss onwas ~~the~~primarily ~~change~~attributable inincreased interest ~~fair~~expense, ~~value~~increased ofprofessional ~~warrant~~fees ~~liabilities~~and inincreased ~~the~~payroll ~~amount of $1~~expenses.~~3 million.~~

Other Income/Expense

Other expense was $0.1 million for the nine months ended September 30, 2014, due to a loss recognized on the settlement of the receivable from the sale of a former subsidiary, with no comparable amount during the nine months ended September 30, 2015.

Net Loss

Our net loss was $17.7 million for the nine months ended September 30, 2015, as compared to $1.8 million for the nine months ended September 30, 2014. The difference is mainly due to the net gain on the change in fair value of derivative and other fair valued instruments of $4.8 million in 2014, as compared to a loss of $6.8 million in 2015, and to the increase in stock-based compensation expense in 2015.

LIQUIDITY AND CAPITAL RESOURCES

We have incurred significant operating losses and have not generated significant revenues since our inception. At September 30, 2015 we had a working capital deficit of $16.0 million and a nominal cash balance. Our cash position is critically deficient, and certain payments essential to our ability to operate are not being made in the ordinary course of business, or at all. Failure to raise capital in the coming days to fund our operations will have a material adverse effect on our financial condition, raising substantial doubt about our ability to continue as a going concern. We currently do not have sufficient cash or other financial resources to fund our operations and meet our obligations, including approximately $8.3 million of total indebtedness that is or will become due, for the next twelve months. While we anticipate that a substantial portion of this indebtedness will be converted into shares of our common stock or satisfied through the return of certain assets, there can be no assurances that we will not receive demands for cash payments on this indebtedness.

VERITEQ CORPORATION AND SUBSIDIARIES

~~Since November of 2013, we have financed our operations primarily~~Liquidity through the issuance of convertible promissory notes (“Convertible Notes”). The outstanding principal amount of Convertible Notes as of September 30, 2015 was approximately $5.0 million. We issued additional Convertible Notes in the aggregate principal amount of approximately $0.4 million between October 1, 2015 and ~~March~~Capital 11, 2016, for which we received $0.3 million in net proceeds. The Convertible Notes generally mature within 9 to 12 months from the date of issuance and bear interest at rates ranging from 8% to 12% per annum with all interest payable at maturity. Outstanding principal and accrued interest is convertible into shares of Common Stock at discounts to the market price of the Company’s Common Stock ranging from 39% to 43%, with the market price being based on the low end of the trading range of the Common Stock during the 10 to 30 days prior to conversion, depending on the specific note being converted. In addition, substantially all of the Convertible Notes contain provisions whereby 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.Resources

AsLiquidity ofis ~~September 30, 2015, we were in payment default on existing indebtedness in~~ the ~~approximate~~ability ~~amount~~ of ~~$0.5~~a ~~million.~~company ~~Our failure~~ to ~~timely~~generate ~~file~~funds ~~our~~to ~~Quarterly~~support ~~Report~~its oncurrent ~~Form~~and ~~10-Q~~future ~~with~~operations, ~~the~~satisfy ~~SEC~~its ~~in August of 2015~~obligations, asand ~~well as our failure to pay some of the convertible~~otherwise ~~notes~~operate ~~that became due, constitute events of default~~ on ~~our~~an ~~Convertible~~ongoing ~~Notes, including approximately $2~~basis.3 ~~million~~At ofJune ~~Senior~~30, ~~Notes. As a result~~2016, we ~~entered~~had ~~into~~a ~~discussions~~cash ~~with~~balance ~~Magna~~of ~~Equities I~~$58,103. ~~LLC,~~Our ~~(together~~working ~~with~~capital ~~its~~deficit ~~affiliate,~~was ~~Magna Equities II~~$14,924,369 ~~“Magna”)~~at ~~the~~June ~~collateral agent for the holders of the Senior Notes~~30, ~~and agreed to the actions taken below~~2016.

OnWe ~~October~~reported ~~19, 2015, we received~~ a ~~default~~net ~~notice~~decrease ~~from Magna, acting~~ in ~~its~~cash ~~capacity~~for ~~as collateral agent under~~ the ~~security~~six ~~agreement pertaining~~months toended ~~the~~June ~~Senior~~30, ~~Notes.~~2016 ~~At the time~~ of ~~the notice~~$11,066. ~~Magna~~While ~~was~~we ~~the~~currently ~~holder~~have ofno ~~outstanding~~material ~~convertible promissory notes of~~commitments ~~the~~for ~~Company~~capital inexpenditures, ~~the~~at ~~aggregate~~June ~~principal~~30, ~~amount~~2016 ofwe owed approximately $~~1.6~~768,000 ~~million~~under ~~(excluding~~mortgage ~~all~~notes ~~accrued~~payable, ~~but~~$332,000 ~~unpaid~~under ~~interest)~~a line of ~~Senior Notes~~credit, ~~and~~approximately ~~had entered into agreements with holders of an additional~~ $0.5.3 million ~~aggregate principal of Senior Notes to acquire such Senior Notes. The default notice demanded repayment of the entire amount due under the Senior Notes~~ (including ~~the~~related ~~$0.5~~party ~~million~~ notes of ~~Senior Notes Magna had the right to acquire~~$250, ~~collectively, the "Magna Notes"~~000). Webut ~~did~~gross ~~not~~before ~~have~~consideration ~~the~~of ~~financial resources~~discounts ~~to repay this indebtedness. The default notice also advised the Company~~ and ~~its~~premiums ~~subsidiaries~~under ~~that~~notes ~~Magna~~payable, ~~was~~$3.3 ~~exercising~~million ~~all~~principal ~~of its rights and remedies~~ under ~~the~~subordinated ~~Magna Notes and the related~~ debt ~~documents. In conjunction with this default notice, we received from Magna a Notification of Disposition of Collateral~~ (~~the~~recorded ~~“NDC”). The NDC advised us that Magna intended to sell, lease or license the assets securing the Senior Notes~~ at afair ~~public~~value ~~auction to take place in early November~~ of ~~2015. These assets constitute substantially all of our assets~~$263,000), ~~except~~and ~~for those assets securing the SNC Note. On November~~ $4, ~~2015~~300, ~~the public auction~~000 ~~took~~in ~~place,~~accounts ~~and~~payable ~~Magna purchased the assets, including the capital stock of our VAC~~ and ~~PositiveID~~accrued ~~Animal Health subsidiaries, for $1 million, which was credited against our outstanding indebtedness to Magna~~expenses.

WeOur ~~may~~net ~~continue~~sales are not sufficient to ~~receive~~fund ~~limited~~our ~~funding~~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 $435,907 during the six months ended June 30, 2016. 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 ~~form~~issuance of ~~additional~~equity ~~Convertible~~or ~~Notes~~debt ~~while~~securities, obtaining credit facilities, or other financing mechanisms. Even if we ~~attempt~~are able to ~~acquire~~raise the funds required, ~~merge~~it oris ~~combine~~possible that we will incur ~~with~~unexpected costs and~~/or~~ ~~acquire~~expenses, ~~operating~~fail ~~assets~~to ofcollect ansignificant ~~operating~~amounts ~~business~~owed to us, ~~however~~or weexperience ~~have~~unexpected nocash ~~commitments~~requirements ~~for~~that would ~~any~~force us to seek alternative financing. The inability to obtain additional ~~funding~~capital ~~and~~may ~~currently~~restrict our ability to grow and ~~have~~may ~~minimal~~reduce ~~cash~~our ~~balances~~ability to continue to conduct business operations. NoIf ~~assurances~~we ~~can~~are beunable ~~given~~to ~~that~~obtain additional financing, we will likely be ~~able~~required to ~~complete~~curtail anour ~~acquisition~~marketing orand ~~merger~~development ~~transaction~~plans and possibly cease our operations. Furthermore, we have debt obligations ~~raise~~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 ~~funds~~capital onand ~~terms~~our ~~acceptable~~financial condition as well as the uncertainty in the capital markets may make our ability to ~~us,~~secure orthis atcapital ~~all,~~difficult. orThere are no assurances that we will be able to continue asour 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 unaudited consolidated financial statements for the six months ended June 30, 2016 is a ~~going~~discussion ~~concern~~regarding Going Concern.

InOperating December 2012, we 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, we issued the SNC Note in the principal amount of $3.3 million. The SNC Note was amended in July 2013 to extend the maturity date to June 30, 2015. The SNC Note has not been repaid. 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.activities

Net cash flows used in operating activities for the six months ended June 30, 2016 amounted to $304,865 and was primarily attributable to our net loss of $435,907, gain on extinguishment of debt of $8,963, change in fair value of derivatives and other fair value instruments of $158,110 offset by depreciation of $14,422, accretion of premium on convertible note payable of $160,000, amortization of debt discount of $89,190, and changes in operating assets and liabilities of $34,503. Net cash flows used in operating activities for the six months ended June 30, 2015 amounted to $300,560 and was primarily attributable to our net loss of $171,670, offset by depreciation of $15,140, amortization of deferred loan costs of $5,895 and changes in operating assets and liabilities of $149,925.

Investing activities

Net cash used in investing activities for the six months ended June 30, 2016 included $37,000 of a pre-acquisition loan to Veriteq Corp.

Financing activities

Net cash flows provided by financing activities was $330,799 for the six months ended June 30, 2016. We received proceeds from convertible notes payable of $621,293. We made notes payable payments of $256,971, repayments of line of credit of $17,347 and mortgage note payments of $16,176. Net cash flows provided by financing activities was $294,999 for the six months ended June 30, 2015. We received proceeds from a line of credit of $65,000 and proceeds from a note payable of $300,000. We had a bank overdraft of $31,263. We made payments to notes payable of $85,604 and mortgage note payments of $15,660.

VERITEQ CORPORATION AND SUBSIDIARIES

AGoing ~~summary~~Concern ~~of our cash flows for the periods indicated is as follows:~~Consideration

(in thousands)	Nine Months Ended September 30,
	2015			2014
Cash used in operating activities	$	(982	)	$	(1,938	)
Cash used in investing activities		(1	)		(20	)
Cash provided by financing activities		909			1,969
(Decrease) increase in cash and cash equivalents		(74	)		11
Cash and cash equivalents, beginning of period		77			13
Cash and cash equivalents, end of year of period	$	3		$	24

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 recent net losses however our stockholders’deficit of $16,304,926 is primarily a result of the recapitalization charges to additional paid in capital of approximately $16.4 million as of June 30, 2016, 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.

~~Cash~~Contractual used in operating activities was $1.0 million and $1.9 million for the nine months ended September 30, 2015 and 2014, respectively. The following table illustrates the primary components of our cash flows from operations:Obligations

(in thousands)	Nine Months Ended June 30,
	2015			2014
Net loss	$	(17,705	)	$	(1,826	)
Non-cash expenses, (gains) and losses		14,880			(1,426	)
Accounts payable and accrued expenses		1,804			1,213
Other, net		39			101
Cash used in operating activities	$	(982	)	$	(1,938	)

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.

~~Cash~~The ~~provided~~following bytable ~~financing~~summarizes ~~activities~~our ~~for~~contractual ~~the~~obligations ~~nine~~as ~~months~~of ~~ended~~June ~~September~~ 30, ~~2015 and 2014 was $0.9 million and $2.0 million~~2016, ~~respectively. During the first nine months of 2015, we raised approximately $1.1 million through the issuance of convertible notes~~ and ~~related party advances, and made repayments of $0.2 million. During~~ the ~~first~~effect ~~nine~~these ~~months~~obligations ofare ~~2014,~~expected weto ~~raised approximately $1.6 million~~have ~~from~~on ~~the~~our ~~issuance~~liquidity ~~of convertible notes~~ and ~~related party advances, made repayments of $0.4 million, and received $0.9 million from the release of~~ cash ~~that~~flows ~~had been previously restricted~~ in ~~connection~~future ~~with notes issued in 2013~~periods.

OTHER MATTERS

	Total		Less than 1 year		1-3 Years		4-5 Years		5 Years +
Contractual Obligations:
Line of credit	$	331,653		331,653		—		—		—
Notes payable	$	5,034,185		4,900,852		133,333		—		—
Related party loans payable	$	121,500		121,500		—		—		—
Related party note payable	$	250,000		250,000		—		—		—
Mortgage payable	$	767,813		32,697		107,713		78,324		549,079
Subordinated debt at principal value	$	3,300,000		3,300,000		—		—		—
Total Contractual Obligations:	$	9,805,151		8,936,702		241,046		78,324		549,079

Inflation

We do not believe inflation has a significant effect on the Company’s operations at this time.

Off Balance Sheet Arrangements

~~Under~~As ~~SEC~~of ~~regulations,~~the wedate ~~are~~of ~~required~~this toQuarterly ~~disclose~~Report, ~~the~~we ~~Company’s~~had no off-balance sheet arrangements. ~~that~~We ~~have or~~ are ~~reasonably~~not ~~likely to~~aware ~~have a current or future effect on the Company’s financial condition, results~~ of ~~operations,~~any ~~liquidity, capital expenditures or capital resources that are~~ material ~~to investors. Off-balance sheet arrangements consist of~~ transactions~~, agreements or contractual~~ ~~arrangements to which any entity~~ that isare not ~~consolidated~~disclosed ~~with~~in usour isconsolidated afinancial ~~party, under which we have:~~statements.

● Any obligation under certain guarantee contracts.

● Any retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to that entity for such assets.

● Any obligation under a contract that would be accounted for as a derivative instrument, except that it is both indexed to the Company’s stock and classified in stockholder’s equity in the Company’s statement of financial position.

● Any obligation arising out of a material variable interest held by us in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us, or engages in leasing, hedging or research and development services with us.

As of September 30, 2015, the Company has no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future effect on the Company’s financial condition, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

VERITEQ CORPORATION AND SUBSIDIARIES

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

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

VERITEQ CORPORATION AND SUBSIDIARIES

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.

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.

Stock-Based Compensation

Stock-based compensation awards to employees are measured at fair value on the grant date and compensation cost is recognized on a straight line basis over the requisite service period of each award. Stock-based compensation awards to nonemployees are measured and expensed at fair value at the date services are rendered.

Related Parties

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 Quarterly 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.

VERITEQ CORPORATION AND SUBSIDIARIES

Forward Looking Statements

Certain statements and the discussion herein regarding the Company’s business and operations that are not purely historical facts, including statements about our beliefs, intentions or future expectations, may be "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934, and as that term is defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements consist of any statement other than a recitation of historical fact and can be identified by the use of forward-looking terminology such as “may”, “expect”, “anticipate”, “intend”, “estimate” or the negative thereof or other variations thereof or comparable terminology. The reader is cautioned that all forward looking statements involve risks and uncertainties and are subject to change at any time, and that our actual results could differ materially from expected results. These risks and uncertainties include, without limitation, VeriTeQ’s ability to continue to raise capital to fund its operations and ~~its~~ ~~proposed~~the ~~Acquisition~~operations of its ~~The Brace Shop~~subsidiaries; as well as other risks or events beyond VeriTeQ’s control. VeriTeQ undertakes no obligation to update or release any revisions to these forward-looking statements to reflect events or circumstances after the date of such statement or to reflect the occurrence of unanticipated events, except as required by law.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Disclosure under this section is not required for a smaller reporting company.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934 (the "Exchange Act"), that are designed to ensure that information required to be disclosed in Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to the Company’s management, including our Chief Executive Officer ~~and our Chief Financial Officer~~, to allow timely decisions regarding required disclosure. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

Our management, with the participation of our Chief Executive Officer ~~and Chief Financial Officer~~, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of ~~September~~June 30, ~~2015~~2016. Based upon this evaluation, the Company’s Chief Executive Officer ~~and Chief Financial Officer~~ concluded that as of ~~September 30~~June30, ~~2015~~2016, the Company’s disclosure controls and procedures were not effective due to the material weakness described below.

A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim consolidated financial statements will not be prevented or detected on a timely basis. The material weakness at ~~September~~June 30, ~~2015~~2016 pertains to a lack of expertise in the valuation of complex debt and equity instruments that are required to be reported at fair value and for their fair values to be adjusted at each accounting period.

To address the material weaknesses described above, the Company continues to seek assistance with various third parties with expertise in such instruments and matters of fair value, in order to ensure that the Company’s consolidated financial statements were prepared in accordance with U.S. ~~GAAP~~GA on a timely basis.

Change in Internal Control over Financial Reporting

There were no changes in internal control over financial reporting during the quarter ended ~~September~~June 30, ~~2015~~2016. The Company has not ~~fully~~ fully remediated its material weakness as of ~~September~~June 30, ~~2015~~2016, and remediation efforts will continue through the remainder of fiscal 2016.

2628

VERITEQ CORPORATION AND SUBSIDIARIES

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

Risk factors describing the major risks to our business can be found under ~~Item 1A,~~ “Risk Factors”, in our ~~Annual~~Current Report on Form 108-K ~~for~~filed ~~the~~on ~~fiscal~~May ~~year ended December 31~~11, ~~2014~~2016. There have been no changes to our risk factors from those previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2014~~2015.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

All unregistered sales of equity securities during the period have been reported on Current Reports on Form 8-K or in Item 5 below.

ITEM 5. OTHER INFORMATION

~~On March 7, 2016, Barry Edelstein resigned as a member of the Company’s Board of Directors for personal reasons and not based upon disputes or disagreements with the Company~~None.

As of the filing of this report, Scott R. Silverman will no longer serve as the Company’s Chief Executive Officer. Kenneth Shapiro, a current director of the Company, will assume the role of Interim Chief Executive Officer of the Company effective immediately. Mr. Silverman has agreed to sell all of his rights, title and interest in and to a promissory note issued by the Company, as well as all securities of the Company currently owned by him, to an unrelated third party investor. Mr. Silverman will receive a new preferred stock instrument in the Company upon the closing of the pending transaction with The Brace Shop.

ITEM 6. EXHIBITS

We have listed the exhibits by numbers corresponding to the Exhibit Table of Item 601 in Regulation S-K on the Exhibit list attached to this report.

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VERITEQ CORPORATION AND SUBSIDIARIES

SIGNATURE

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 thereunto duly authorized.

	VERITEQ CORPORATION
	(Registrant)
Date: March 16, 2016	By:	/s/ Marc S. Gelberg
Date: February 17, 2017	By:	/s/ Kenneth Shapiro
	Name:	~~Marc~~Kenneth ~~S. Gelberg~~Shapiro
	Title:	Chief ~~Accounting~~Executive Officer ~~and Interim Chief Financial Officer~~
		(Duly Authorized Officer)

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INDEX TO EXHIBITS

Exhibit No.		Description of Exhibit
31.1		Certification by ~~Scott~~Kenneth R.Shapiro ~~Silverman~~ Chief Executive Officer, pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a)
31.2		Certification by Marc S. Gelberg, Chief Accounting Officer and Interim Chief Financial Officer, pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a)
32.1		Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS		XBRL Taxonomy Extension Instance Document
101.SCH		XBRL Taxonomy Extension Schema Linkbase Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Labels Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

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Filing Compare · VERITEQ