ITEM
1 FINANCIAL STATEMENTS
VERITEC,
INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
March 31,
|
|
June 30,
|
|
|
2016
|
|
2015
|
ASSETS
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
30,378
|
|
|
$
|
52,762
|
|
Accounts receivable
|
|
|
15,386
|
|
|
|
38,749
|
|
Inventories
|
|
|
—
|
|
|
|
14,461
|
|
Prepaid expenses
|
|
|
758
|
|
|
|
18,234
|
|
Total Current Assets
|
|
|
46,522
|
|
|
|
124,206
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
36,398
|
|
|
|
63,029
|
|
Property and equipment, net
|
|
|
274
|
|
|
|
583
|
|
Intangibles, net
|
|
|
96,250
|
|
|
|
144,375
|
|
Total Assets
|
|
$
|
179,444
|
|
|
$
|
332,193
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Notes payable
|
|
$
|
542,214
|
|
|
$
|
521,610
|
|
Notes payable, related party
|
|
|
1,243,107
|
|
|
|
3,041,097
|
|
Accounts payable
|
|
|
618,941
|
|
|
|
630,490
|
|
Accounts payable, related party
|
|
|
96,110
|
|
|
|
96,110
|
|
Customer deposits
|
|
|
25,482
|
|
|
|
25,482
|
|
Deferred revenues
|
|
|
396,150
|
|
|
|
492,603
|
|
Payroll tax liabilities
|
|
|
322,477
|
|
|
|
453,277
|
|
Accrued expenses
|
|
|
66,841
|
|
|
|
22,957
|
|
Total Current Liabilities
|
|
|
3,311,322
|
|
|
|
5,283,626
|
|
|
|
|
|
|
|
|
|
|
Contingent earnout liability
|
|
|
155,000
|
|
|
|
155,000
|
|
Total Liabilities
|
|
|
3,466,322
|
|
|
|
5,438,626
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
|
|
|
Stockholders' Deficiency:
|
|
|
|
|
|
|
|
|
Convertible preferred stock, par value $1.00; authorized
10,000,000 shares, 276,000 shares of Series H authorized, 1,000 shares issued and outstanding as of March 31, 2016 and June
30, 2015, respectively
|
|
|
1,000
|
|
|
|
1,000
|
|
Common stock, par value $.01; authorized 50,000,000 shares, 39,538,007 and 16,530,088 shares issued and outstanding as of March 31, 2016 and June 30, 2015, respectively
|
|
|
395,380
|
|
|
|
165,301
|
|
Common stock to be issued, 155,000 shares and 940,000 shares, respectively
|
|
|
12,500
|
|
|
|
51,800
|
|
Additional paid-in capital
|
|
|
17,881,719
|
|
|
|
14,959,006
|
|
Accumulated deficit
|
|
|
(21,577,477
|
)
|
|
|
(20,283,540
|
)
|
Total Stockholders' Deficiency
|
|
|
(3,286,878
|
)
|
|
|
(5,106,433
|
)
|
Total Liabilities and Stockholders’ Deficiency
|
|
$
|
179,444
|
|
|
$
|
332,193
|
|
See
accompanying notes
VERITEC,
INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015
(UNAUDITED)
|
|
Three Months Ended March 31,
|
|
|
2016
|
|
2015
|
|
|
(Unaudited)
|
|
(Unaudited)
|
Revenue:
|
|
|
|
|
|
|
|
|
Mobile banking technology revenue
|
|
$
|
59,803
|
|
|
$
|
62,521
|
|
Barcode technology revenue
|
|
|
—
|
|
|
|
109,664
|
|
Other revenue, related party
|
|
|
16,098
|
|
|
|
—
|
|
Total revenue
|
|
|
75,901
|
|
|
|
172,185
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales
|
|
|
52,722
|
|
|
|
85,079
|
|
Gross Profit
|
|
|
23,179
|
|
|
|
87,106
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
170,451
|
|
|
|
201,175
|
|
Sales and marketing
|
|
|
—
|
|
|
|
16,660
|
|
Research and development
|
|
|
17,248
|
|
|
|
25,007
|
|
Total operating expenses
|
|
|
187,699
|
|
|
|
242,842
|
|
|
|
|
|
|
|
|
|
|
Loss from Operations
|
|
|
(164,520
|
)
|
|
|
(155,736
|
)
|
Other Expense:
|
|
|
|
|
|
|
|
|
Interest expense and finance costs, including $45,581 and $114,229, respectively, to related parties
|
|
|
(51,658
|
)
|
|
|
(122,339
|
)
|
Total other expense
|
|
|
(51,658
|
)
|
|
|
(122,339
|
)
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(216,178
|
)
|
|
$
|
(278,075
|
)
|
|
|
|
|
|
|
|
|
|
Net Loss Per Common Share, Basic and diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
Weighted Average Number of Shares Outstanding, Basic
and diluted
|
|
|
39,538,007
|
|
|
|
16,523,784
|
|
See
accompanying notes
VERITEC,
INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 2016 AND 2015
(UNAUDITED)
|
|
Nine Months Ended March 31,
|
|
|
2016
|
|
2015
|
|
|
(Unaudited)
|
|
(Unaudited)
|
Revenue:
|
|
|
|
|
|
|
|
|
Mobile banking technology revenue
|
|
$
|
198,524
|
|
|
$
|
351,868
|
|
Barcode technology revenue
|
|
|
133,714
|
|
|
|
373,071
|
|
Other revenue, related party
|
|
|
38,066
|
|
|
|
—
|
|
Total revenue
|
|
|
370,304
|
|
|
|
724,939
|
|
|
|
|
|
|
|
|
|
|
Cost of Sales
|
|
|
250,310
|
|
|
|
253,739
|
|
Gross Profit
|
|
|
119,994
|
|
|
|
471,200
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
567,468
|
|
|
|
571,135
|
|
Sales and marketing
|
|
|
16,641
|
|
|
|
61,856
|
|
Research and development
|
|
|
59,064
|
|
|
|
82,365
|
|
Total operating expenses
|
|
|
643,173
|
|
|
|
715,356
|
|
|
|
|
|
|
|
|
|
|
Loss from Operations
|
|
|
(523,179
|
)
|
|
|
(244,156
|
)
|
|
|
|
|
|
|
|
|
|
Other Expense:
|
|
|
|
|
|
|
|
|
Interest expense and finance costs, including $750,699 and $290,112, respectively, to related parties
|
|
|
(770,758
|
)
|
|
|
(312,746
|
)
|
Total other expense
|
|
|
(770,758
|
)
|
|
|
(312,746
|
)
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(1,293,937
|
)
|
|
$
|
(556,902
|
)
|
|
|
|
|
|
|
|
|
|
Net Loss Per Common Share, Basic and diluted
|
|
$
|
(0.04
|
)
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
Weighted Average Number of Shares Outstanding, Basic
and diluted
|
|
|
31,757,147
|
|
|
|
16,472,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes
VERITEC,
INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIENCY
FOR
THE NINE MONTHS ENDED MARCH 31, 2016
(UNAUDITED)
|
|
|
Preferred Stock
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
|
Amount
|
|
|
|
Shares
|
|
|
|
Amount
|
|
|
|
Common Stock to be Issued
|
|
|
|
Additional Paid-in Capital
|
|
|
|
Accumulated
Deficit
|
|
|
|
Stockholders’
Deficiency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, July 1, 2015
|
|
|
1,000
|
|
|
$
|
1,000
|
|
|
|
16,530,088
|
|
|
$
|
165,301
|
|
|
$
|
51,800
|
|
|
$
|
14,959,006
|
|
|
$
|
(20,283,540
|
)
|
|
$
|
(5,106,433
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued on conversion of notes payable
|
|
|
—
|
|
|
|
—
|
|
|
|
22,192,919
|
|
|
|
221,929
|
|
|
|
—
|
|
|
|
1,553,505
|
|
|
|
—
|
|
|
|
1,775,434
|
|
Shares issued for common stock to be issued
|
|
|
—
|
|
|
|
—
|
|
|
|
815,000
|
|
|
|
8,150
|
|
|
|
(41,400
|
)
|
|
|
33,250
|
|
|
|
—
|
|
|
|
—
|
|
Shares to be issued for services
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,100
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,100
|
|
Beneficial conversion feature on issuance of convertible notes payable
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
77,188
|
|
|
|
—
|
|
|
|
77,188
|
|
Fair value of shares issued as inducement for conversion of notes payable
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
452,770
|
|
|
|
—
|
|
|
|
452,770
|
|
Modification cost of conversion feature of note payable
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
136,000
|
|
|
|
—
|
|
|
|
136,000
|
|
Gain on sale of assets to related party treated as a capital contribution
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
670,000
|
|
|
|
—
|
|
|
|
670,000
|
|
Net Loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,293,937
|
)
|
|
|
(1,293,937
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, March 31, 2016 (Unaudited)
|
|
|
1,000
|
|
|
$
|
1,000
|
|
|
|
39,538,007
|
|
|
$
|
395,380
|
|
|
$
|
12,500
|
|
|
$
|
17,881,719
|
|
|
$
|
(21,577,477
|
)
|
|
$
|
(3,286,878
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes
VERITEC,
INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
Nine Months Ended
March 31,
|
|
|
2016
|
|
2015
|
|
|
(Unaudited)
|
|
(Unaudited)
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(1,293,937
|
)
|
|
$
|
(556,902
|
)
|
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
309
|
|
|
|
309
|
|
Amortization
|
|
|
48,125
|
|
|
|
32,083
|
|
Allowance for inventory obsolescence
|
|
|
14,461
|
|
|
|
—
|
|
Shares to be issued for services
|
|
|
2,100
|
|
|
|
17,350
|
|
Beneficial conversion feature on convertible notes payable
|
|
|
77,188
|
|
|
|
175,375
|
|
Fair value of shares issued as inducement for conversion of notes payable
|
|
|
452,770
|
|
|
|
—
|
|
Modification cost of conversion feature of note payable
|
|
|
136,000
|
|
|
|
—
|
|
Interest accrued on notes payable
|
|
|
104,532
|
|
|
|
136,129
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
23,363
|
|
|
|
(89,173
|
)
|
Restricted cash
|
|
|
26,631
|
|
|
|
(6,008
|
)
|
Inventories
|
|
|
—
|
|
|
|
(4,847
|
)
|
Prepaid expenses
|
|
|
17,746
|
|
|
|
9,772
|
|
Deferred revenues
|
|
|
(96,453
|
)
|
|
|
242,386
|
|
Payroll tax liabilities
|
|
|
(130,800
|
)
|
|
|
(57,041
|
)
|
Customer deposit
|
|
|
—
|
|
|
|
(5,517
|
)
|
Accounts payables and accrued expenses
|
|
|
32,335
|
|
|
|
54,422
|
|
Net cash used in operating activities
|
|
|
(585,630
|
)
|
|
|
(51,662
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds from notes payable, related party
|
|
|
565,746
|
|
|
|
224,500
|
|
Payment on notes payable, related party
|
|
|
(2,500
|
)
|
|
|
(143,500
|
)
|
Net cash provided by financing activities
|
|
|
563,246
|
|
|
|
81,000
|
|
|
|
|
|
|
|
|
|
|
NET DECREASE IN CASH
|
|
|
(22,384
|
)
|
|
|
29,338
|
|
|
|
|
|
|
|
|
|
|
CASH AT BEGINNING OF YEAR
|
|
|
52,762
|
|
|
|
24,665
|
|
|
|
|
|
|
|
|
|
|
CASH AT END OF YEAR
|
|
$
|
30,378
|
|
|
$
|
54,003
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
NON CASH INVESTING AND FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Related party capital contribution on sale of assets offset to related party notes payable balance
|
|
$
|
670,000
|
|
|
$
|
—
|
|
Conversion of notes payable into common stock
|
|
$
|
1,775,434
|
|
|
$
|
—
|
|
Common stock issued for acquisition
|
|
$
|
—
|
|
|
$
|
37,500
|
|
Contingent earnout liability from acquisition
|
|
$
|
—
|
|
|
$
|
155,000
|
|
See accompanying notes
VERITEC,
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED MARCH 31, 2016 AND 2015
(UNAUDITED)
NOTE
1. NATURE OF BUSINESS
References
to the “Company” in this Form 10-Q refer to Veritec, Inc. (“Veritec”) and its wholly owned subsidiaries
Vcode Holdings, Inc. (Vcode®), and Veritec Financial Systems, Inc. (VTFS).
The
Company as primarily engaged in the development, marketing, sales and licensing of products and rendering of professional services
related to the mobile banking technology. On September 30, 2015, the Company sold its barcode technology assets to a related party
(See Note 7). Subsequent to September 30, 2015, the Company is currently focusing exclusively on its mobile banking technology
business.
Mobile
Banking Solutions
In
January 12, 2009, Veritec formed VTFS, a Delaware corporation, to bring its Mobile Banking Technology, products and related professional
services to market. Starting in May 2009, Veritec has been registered by various banking institutions to market and processes
the Company’s Visa branded card programs. In February, 2014 the Company began its current relationship with Woodland National
Bank.
On
December 31, 2014, Veritec acquired certain assets and liabilities of the Tangible Payments LLC related to the Company’s
mobile banking technology solutions (See Note 6).
Barcode
Technology (Sold September 30, 2015)
The
Company’s Barcode Technology was originally invented by the founders of Veritec and included products that contained our
VeriCode ® Barcode Technology for identification and tracking of manufactured parts, components and products mostly in the
liquid crystal display markets. On September 30, 2015, the Company sold all of its assets of its Barcode Technology, which was
comprised solely of its intellectual property, to The Matthews Group, a related party (see Note 7). The sale allows the Company
to focus its efforts solely on its Mobile Banking Solutions.
Effective
October 1, 2015, the Company entered into a management services agreement with The Matthews Group for which the Company will manage
all facets of its previous barcode technology operations, on behalf of the Matthews Group, from October 1, 2015 to May 30, 2016
(see Note 10). The Matthews Group bears the risk of loss from the barcode operations and has the right to the residual benefits
of the barcode operations.
Joint
Venture Agreement
On
January 17, 2016, Veritec Inc. (the “Company”) entered into an agreement with Vietnam Alliance Capital (“VAC”),
which is domiciled in Vietnam, to form a joint venture (“JV’) to operate a debit card business in Vietnam. The JV
will be named Veritec Asia. The Company will be a 30% member in the JV and VAC will be a 70% member in the JV. Pursuant to the
agreement, the Company will grant a license of certain products to the JV, and provide certain technologies and technological
support to the JV. VAC will manage, control, and conduct its day-to-day business and development activities. In addition VAC has
agreed to raise all funds to capitalize the JV. As of March 31, 2016, the JV has not received funding from VAC and no operating
activity has occurred.
NOTE
2. BASIS OF PRESENTATION
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States of America
generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form
10-Q. Accordingly, the condensed consolidated financial statements do not include all of the information and footnotes required
for complete financial statements.
In
the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three and nine month periods ended March 31, 2016 are not necessarily indicative
of the results that may be expected for the year ending June 30, 2016. The Condensed Consolidated Balance Sheet as of March 31,
2016 was derived from the unaudited consolidated financial statements as of such date, but does not include all of the information
and footnotes required by GAAP. For further information, refer to the Consolidated Financial Statements and footnotes thereto
included in our Form 10-K as of and for the year ended June 30, 2015.
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Those estimates and assumptions include estimates for reserves of uncollectible accounts, analysis of impairments of long lived
assets, accruals for potential liabilities and assumptions made in valuing stock instruments issued for services.
The
accompanying condensed consolidated financial statements include the accounts of Veritec, VCode, and VTFS. Inter-company transactions
and balances were eliminated in consolidation.
NOTE
3. GOING CONCERN
The
accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern,
which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. During the nine
months ended March 31, 2016, the Company incurred a net loss of $1,293,937 and used cash to fund operating activities of $585,630,
and at March 31, 2016, the Company had a stockholders’ deficiency of $3,286,878. In addition, as of March 31, 2016, the
Company is delinquent in payment of $1,785,321 of its notes payable and is also delinquent in payment of $322,477 in payroll taxes
and accrued interest and penalties.
These
factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s
ability to continue as a going concern is dependent upon its ability to develop additional sources of capital and to achieve profitable
operations. The Company’s independent registered public accounting firm, in their report on the Company’s financial
statements for the year ending June 30, 2015, expressed substantial doubt about the Company’s ability to continue as a going
concern. The Company’s financial statements do not include any adjustments that might result from the outcome of these uncertainties.
The
Company believes its cash and forecasted cash flow from operations will not be sufficient to continue operations through fiscal
2016 without continued external investment. The Company will require additional funds to continue its operations through fiscal
2016 and to continue to develop its existing projects and plans to raise such funds by finding additional investors to purchase
the Company’s securities, generating sufficient sales revenue, implementing dramatic cost reductions or any combination
thereof. There is no assurance that the Company can be successful in raising such funds, generating the necessary sales or reducing
major costs. Further, if the Company is successful in raising such funds from sales of equity securities, the terms of these sales
may cause significant dilution to existing holders of common stock.
NOTE
4. SIGNIFICANT ACCOUNTING POLICIES
Use
of Estimates
The
preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that may affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts
of revenues and expenses during the reporting period. Actual results could differ from those estimates. Those estimates and assumptions
include estimates for reserves of uncollectible accounts, analysis of impairments of long lived assets, accruals for potential
liabilities and assumptions made in valuing stock-based compensation.
Revenue
Recognition
The
Company’s revenue is classified into barcode technology revenue, mobile banking technology revenue, and other revenue-related
party.
Barcode
technology revenues from licenses and identification cards are recognized when the product is shipped, the Company no longer has
any service or other continuing obligations, and collection is reasonably assured. Under some conditions, the customers remit
payment prior to the Company having completed importation of the software. In these instances, the Company delays revenue recognition
and reflects the prepayments as customer deposits.
For
mobile banking technology revenue, the Company, as a processor and a distributor, recognizes revenue from transaction fees charged
cardholders for the use of its issued mobile debit cards. The fees are recognized on a monthly basis after all cardholder transactions
have been summarized and reconciled with third party processors.
The
Company has a management services agreement with a related party to manage its previous barcode technology assets and recognizes
revenue when the management fee is collected.
Fair
Value Measurements
Fair
value measurements are determined using authoritative guidance issued by the FASB, with the exception of the application of the
guidance to non-recurring, non-financial assets and liabilities as permitted. Fair value is defined in the authoritative guidance
as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market
for the asset or liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy
was established, which prioritizes the inputs used in measuring fair value into three broad levels as follows:
Level
1—Quoted prices in active markets for identical assets or liabilities.
Level
2—Inputs, other than the quoted prices in active markets, are observable either directly or indirectly.
Level
3—Unobservable inputs based on the Company's assumptions.
The
Company is required to use observable market data if available without undue cost and effort.
The
Company’s financial instruments include cash, accounts receivable, and accounts payable. Management has estimated that the
carrying amounts approximate their fair value due to their short-term nature.
Net
Loss per Common Share
Basic
earnings (loss) per share are computed by dividing the net income (loss) applicable to Common Stockholders by the weighted average
number of shares of Common Stock outstanding during the year. Diluted earnings (loss) per share is computed by dividing the net
income (loss) applicable to Common Stockholders by the weighted average number of common shares outstanding plus the number of
additional common shares that would have been outstanding if all dilutive potential common shares had been issued, using the treasury
stock method. Potential common shares are excluded from the computation if their effect is antidilutive.
For
the three months and nine months ended March 31, 2016 and 2015, the calculations of basic and diluted loss per share are the same
because potential dilutive securities would have an anti-dilutive effect.
As
of March 31, 2016 and 2015, we excluded the outstanding securities summarized below, which entitle the holders thereof to acquire
shares of common stock, from our calculation of earnings per share, as their effect would have been anti-dilutive.
|
|
March 31,
|
|
|
2016
|
|
2015
|
Series H preferred stock
|
|
|
10,000
|
|
|
|
10,000
|
|
Convertible notes payable
|
|
|
9,884,519
|
|
|
|
16,077,124
|
|
Options
|
|
|
2,510,000
|
|
|
|
2,530,500
|
|
Total
|
|
|
12,404,519
|
|
|
|
18,617,624
|
|
Concentrations
Revenues
During
the three months ended March 31, 2016 and 2015, the Company had three customers that accounted for approximately 24%, 19%, and
16% of sales in 2016 and two customers that accounted for approximately 24% and 11% of sales in 2015, respectively. No other customers
accounted for more than 10% of sales in either period.
During
the nine months ended March 31, 2016 and 2015, the Company had no customers that accounted for more than 10% of sales in 2016
and two customers that accounted for approximately 16% and 13% of sales in 2015, respectively. No other customers accounted for
more than 10% of sales in either period.
Foreign
Revenues
For
the three months ended March 31, 2016 and 2015, foreign revenues accounted for 0% and 49% (27% Taiwan, 12% Korea, 7% China and
3% other) of the Company’s total revenues, respectively.
For
the nine months ended March 31, 2016 and 2015, foreign revenues accounted for 36% (11% Taiwan, 10% China, and 15% other) and 42%
(19% Taiwan, 10% Korea, 8% China, and 5% other) of the Company’s total revenues, respectively.
Accounts
Receivable
As
of March 31, 2016, the Company had approximately $5,700 (37%), $3,000 (19%), $2,000 (13%) and $2,000 (13%) respectively, of accounts
receivable due from its major customers. As of June 30, 2015, the Company had approximately $6,025 (16%), $5,650 (15%), and $4,575
(12%) of accounts receivable due from its major customers.
Recent
Accounting Pronouncements
In
May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts
with Customers. ASU 2014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition
guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09
will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract.
The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising
from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to
obtain or fulfill a contract. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2017. Early
adoption is permitted only in annual reporting periods beginning after December 15, 2016, including interim periods therein. Entities
will be able to transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption.
The Company is in the process of evaluating the impact of ASU 2014-09 on the Company’s financial statements and disclosures.
In
February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The new standard requires a lessee to record a right of use asset
and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months, including leases currently
accounted for as operating leases. ASU 2016-02 is effective for all interim and annual reporting periods beginning after December
15, 2018. Early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating
leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements,
with certain practical expedients available. We are currently evaluating the impact that the adoption of ASU 2016-02 will have
on our financial statements and related disclosures.
Other
recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified
Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact
on the Company's present or future consolidated financial statements.
NOTE 5. RESTRICTED CASH
The
Company entered into Store Value Prepaid Card Sponsorship Agreements (the “Agreements”) with certain banks whereas
the Company markets and sells store value prepaid card programs (the “Programs”). The Programs are marketed and managed
daily at the direction of the bank, for which the Company receives a transaction fee. In connection with the Agreements the Company
is required to establish a Reserve Account controlled by the bank. At March 31, 2016 and June 30, 2015, the restricted cash totaled
$36,398 and $63,029, respectively. Since this amount is restricted for the purposes related to the Programs, it is classified
as restricted cash on the consolidated balance sheets.
NOTE
6. ACQUISITION
On
December 31, 2014, the Company and Tangible Payments LLC, a Maryland Limited Liability Company, entered into an Asset Purchase
Agreement pursuant to which the Company acquired certain assets and liabilities of Tangible Payments LLC. Tangible Payments LLC
provides a software package that provides integrated services for mobile banking applications.
The
purchase price for the acquisition was comprised of 250,000 shares of restricted common stock of Veritec valued at $37,500, issued
on closing, and an earnout payment of $155,000 for an aggregate purchase price of $192,500. The earnout payment is payable on
a monthly basis from the net profits derived from the acquired assets commencing three months after the closing. The earnout payment
is accelerated and the balance of the earnout payment shall be due in full at such time as Veritec receives equity investments
aggregating $1.3 million.
The
Company assigned $192,500 of the purchase price to contract commitments which is being amortized over a three year period. During
the three and nine months ended March 31, 2016 and 2015, the Company recorded $16,042, $48,125, $16,042, and $32,083 of amortization
expense, respectively.
The
following table presents our unaudited pro forma combined historical results of operations for the three and nine months ended
March 31, 2015 as if we had consummated the acquisition as of July 1, 2014.
|
|
Three months
ended March 31,
2015
|
|
Nine months ended March 31,
2015
|
|
|
(Unaudited)
|
|
(Unaudited)
|
Revenues
|
|
|
172,185
|
|
|
|
787,064
|
|
Net loss
|
|
|
(231,841
|
)
|
|
|
(596,285
|
)
|
NOTE
7. NOTES PAYABLE
Notes
payable includes accrued interest and consists of the following as of March 31, 2016 and June 30, 2015:
|
|
|
March 31,
2016
|
|
|
|
June 30,
2015
|
|
Convertible notes
payable, including $1,113,226 and $2,326,609 due to related parties at March 31, 2016 and June 30, 2015,
respectively. At March 31, 2016, $694,268 of the convertible notes, including $467,695 due to related parties, are
in default. The notes are unsecured, interest at 5% to 10%, and due on various dates through March 2016 or on
demand. The principal and accrued interest are convertible at a conversion prices ranging from $0.08 per share to
$0.40 per share. On September 30, 2015, a portion of the outstanding balances were converted into shares of common
stock (see (1) below), settled from sale of assets (see (2) below), or replaced (see (3) below).
|
|
$
|
1,339,778
|
|
|
$
|
2,512,267
|
|
|
|
|
|
|
|
|
|
|
Notes payable, including
$129,881 and $714,488 due to related parties at March 31, 2016 and June 30, 2015, respectively. At March 31, 2016, $318,077
of the notes payable, including $3,000 due to related parties, are in default. The notes are both secured by the Company’s
intellectual property, and unsecured, interest at 0% to 10%. On September 30, 2015, a portion of the outstanding balance were
converted into shares of common stock (see (1) below).
|
|
|
445,543
|
|
|
|
1,049,740
|
|
Total
|
|
$
|
1,785,321
|
|
|
$
|
3,562,707
|
|
During
the three and nine months ended March 31, 2016 and 2015, the Company recorded interest expense on its convertible notes payable
and notes payable of $29,663, $104,802, $44,816 and $136,129, respectively.
(1)
On September 30, 2015, the Company agreed to convert $1,775,433 of various convertible notes payable to The Matthews Group into
22,122,919 shares of common stock, or $0.08 per share. The Matthews Group is owned 50% by Ms. Van Tran, the Company’s CEO/Executive
Chair and a director, and 50% by Larry Johanns, a significant stockholder of the Company (see Note 10). The transaction included
$670,038 of notes that were converted at less than their stated conversion prices which ranged from $0.10 per share to $0.33 per
share. The Company determined this was an induced conversion and calculated an inducement expense of $452,770, which represents
the fair value of the additional number of common shares issued as a result of the lower conversion price. The Company recorded
the $452,770 in interest expense and additional paid in capital. No similar expense occurred during the same period of the prior
year.
(2)
On September 30 2015, the Company sold its Barcode Technology assets to The Matthews Group for $670,000 in settlement of various
convertible notes payables due to The Matthews Group. The cost basis of the Barcode Technology assets were zero, resulting in
a gain of $670,000. As the transaction was between the Company and The Matthews Group, a related party, the Company accounted
for the gain as a capital contribution.
(3)
On September 28, 2015, the Company agreed to replace a convertible note payable for $200,000 due to The Matthews Group that was
in default (the original note) with another convertible note payable for $200,000 due to the Matthews Group (the replacement note).
The original note was for $200,000, secured, 8% interest rate, and convertible into common stock at a rate of $0.25 per share.
The replacement note is for $200,000, unsecured, 10% interest rate, and convertible into common stock at a rate of $0.08 per share.
The Company determined that the change in the fair value of the conversion option was more than 10% of the carrying value of the
original note and recorded a loss on extinguishment of $136,000. The $136,000 is included in interest expense and finance costs
and additional paid in capital. No similar expense occurred during the same period of the prior year.
During
the nine months ended March 31, 2016, the Company issued $441,389 of convertible notes payable-related party. In addition, the
Company received loans of $124,357 from The Matthews Group related to the sale of the Company’s Barcode Technology to The
Matthews Group (see Note 1). The convertible notes payable-related party can be converted at a price of $0.08 per share. The market
price on the date some of the convertible notes payable-related party were issued was in excess of the conversion price, and as
a result the Company recognized an expense of $77,188 which is included in interest expense.
For
the purposes of Balance Sheet presentation notes payable have been presented as follows:
|
|
|
|
|
|
March 31,
2016
|
|
|
|
June 30,
2015
|
|
Notes payable
|
|
$
|
542,214
|
|
|
$
|
521,610
|
|
Notes payable, related party
|
|
|
1,243,107
|
|
|
|
3,041,097
|
|
Total
|
|
$
|
1,785,321
|
|
|
$
|
3,562,707
|
|
NOTE
8 - STOCKHOLDERS’ DEFICIENCY
Common
Stock to be issued
On
July 15, 2014, the Company entered into a consulting agreement with a consultant, which included, among other things, monthly
compensation of 5,000 shares of common stock. The consulting agreement was terminated on October 31, 2015. As of June 30, 2015,
50,000 shares of common stock with a value of $7,400 have not been issued and are included in common shares to be issued in the
accompanying consolidated balance sheet. During the nine months ended March 31, 2016, the Company recorded an obligation to issue
an additional 20,000 shares of common stock with an aggregate fair value of $2,100. As of March 31, 2016, the 70,000 shares of
common stock with a value of $9,500 have not been issued and are included in common shares to be issued in the accompanying consolidated
balance sheet.
NOTE
9 – STOCK OPTIONS
Stock
Options
A
summary of stock options for the three months ended March 31, 2016 is as follows:
|
|
Number of Shares
|
|
Weighted - Average Exercise Price
|
|
Outstanding at June 30, 2015
|
|
|
|
2,520,000
|
|
|
$
|
0.42
|
|
|
Granted
|
|
|
|
—
|
|
|
$
|
0.00
|
|
|
Forfeited
|
|
|
|
(10,000)
|
|
|
$
|
0.42
|
|
|
Outstanding at March 31, 2016
|
|
|
|
2,510,000
|
|
|
$
|
0.42
|
|
|
Exercisable at March 31, 2016
|
|
|
|
2,510,000
|
|
|
$
|
0.42
|
|
At
March 31, 2016, the Company had 2,510,000 of options outstanding and exercisable. There were no options granted during the nine
months ended March 31, 2016 and the Company recognized no stock-based compensation expense related to stock options during the
three and nine months ended March 31, 2016 and 2015, respectively. As of March 31, 2016, there was no remaining unrecognized compensation
costs related to stock options, and there was no intrinsic value of these options.
Additional
information regarding options outstanding as of March 31, 2016 is as follows:
Options Outstanding at
March 31, 2016
|
|
Options Exercisable at
March 31, 2016
|
|
Range
of Exercise
|
|
|
|
Number
of Shares Outstanding
|
|
|
|
Weighted Average Remaining Contractual Life
(Years)
|
|
|
|
Weighted
Average Exercise Price
|
|
|
|
Number
of Shares Exercisable
|
|
|
|
Weighted
Average Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.13 - $1.45
|
|
|
|
2,510,000
|
|
|
|
4.00
|
|
|
$
|
0.42
|
|
|
|
2,510,000
|
|
|
$
|
0.42
|
|
|
|
|
|
|
2,510,000
|
|
|
|
|
|
|
|
|
|
|
|
2,510,000
|
|
|
|
|
|
The
weighted-average remaining contractual life of stock options outstanding and exercisable at March 31, 2016 is 4.00 years.
NOTE
10. RELATED PARTY TRANSACTIONS
The
Company has relied on The Matthews Group, LLC, owned 50% by Ms. Van Tran, the Company’s CEO/Executive Chair and a director,
and 50% by Larry Johanns, a significant stockholder of the Company, for funding (see Note 8).
During
the year ended June 30, 2015, the Company received various unsecured, non-interest bearing, due on demand advances from its CEO
Ms. Van Tran, a related party. During the nine months March 31, 2016, the Company received no additional advances from Ms. Tran.
The balances due Ms. Tran as of March 31, 2016 and June 30, 2015 were $96,110 and $96,110, respectively. These advances have been
classified as accounts payable, related party on the accompanying consolidated balance sheets.
Effective
October 1, 2015, the Company entered into a management services agreement with the Matthews Group for which the Company will manage
all facets of its previous barcode technology operations, on behalf of the Matthews Group, from October 1, 2015 to May 30, 2016.
Per the terms of the management services agreement, the Company earns a fee of 20% of all revenues, or $16,098 and $38,066, from
the barcode technology operations during the three months and nine months ended March 31, 2016, respectively. Additionally all
cash flow (all revenues collected less direct costs paid) will be retained by the Company and classified as a unsecured note payable-related
party, due on demand, bearing interest at 10% per annum. At March 31, 2016, the total of note payable-related party related to
this agreement was $124,357 (see Note 7). The Matthews Group bears the risk of loss from the barcode operations and has the right
to the residual benefits of the barcode operations.
The
Company also leases its office facilities from Ms. Tran. For the three and nine months ended March 31, 2016 and 2015, rental payments
to Ms. Van Tran totaled $12,750, $38,250, $12,750 and $38,250, respectively.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results
of Operations – Three Months Ended March 31, 2016 compared to March 31, 2015
We
had a net loss of $216,178 and $278,075 for the three months ended March 31, 2016 and 2015, respectively.
Revenues
Details
of revenues are as follows:
|
|
Three Months Ended March 31,
|
|
Increase (Decrease)
|
|
|
2016
|
|
2015
|
|
$
|
|
%
|
Mobile Banking Technology
|
|
$
|
59,803
|
|
|
$
|
62,521
|
|
|
$
|
(2,718
|
)
|
|
|
(4.3
|
)
|
Barcode Technology
|
|
|
—
|
|
|
|
109,664
|
|
|
|
(109,664
|
)
|
|
|
(100.0
|
)
|
Other Revenue, related party
|
|
|
16,098
|
|
|
|
—
|
|
|
|
16,098
|
|
|
|
100.00
|
|
Total Revenues
|
|
$
|
75,901
|
|
|
$
|
172,185
|
|
|
$
|
(96,284
|
)
|
|
|
(55.9
|
)
|
Mobile
Banking Technology
Mobile
Banking Technology revenues include products such as the Company’s Blinx On-Off™ prepaid toggle Card and its Open
Loop/Close Loop System and Bio ID Card Platform. Mobile Banking Technology uses web-based mobile technology to offer financial
cardholders the very best technology in conducting secure financial transactions in real time, protecting personal identity, and
financial account security. Mobile Banking Technology revenues for the three months ended March 31, 2016 and 2015 were $59,803
and $62,521, respectively.
Barcode
Technology
On
September 30, 2015, the Company and The Matthews Group, a related party, entered into an Asset Purchase Agreement pursuant to
which the Company sold the intellectual property assets relating to its Barcode Technology.
Other
Revenue, related party
Effective
October 1, 2015, the Company entered into a management services agreement with the Matthews Group for which the Company will manage
its previous barcode technology business, on behalf of the Matthews Group, from October 1, 2015 to May 30, 2016. Per the terms
of the management services agreement, the Company earned 20% of all revenues, or $16,098, from the barcode technology business
during the three months ended March 31, 2016.
Cost
of Sales
Cost
of sales for the three months ended March 31, 2016 and 2015, totaled $52,722 and $85,079, respectively. The decrease in expense
of $32,357 was the result of decreased labor costs associated with projects being implemented during the period as compared to
the same period of the prior year. For the three months ended March 31, 2016 and 2015, cost of sales as a percentage of revenue
were 69.5% and 49.4%, respectively.
Operating
Expenses
General
and administrative expense for the three months ended March 31, 2016 and 2015 was $170,451 and $201,175, respectively. The decrease
of $30,724 in expenses was realized from expense reductions relating to the sale of its barcode technology business and reduced
outside contractors and professional fees.
Sales
and marketing expense for the three months ended March 31, 2016 and 2015 was $0 and $16,660, respectively. The decrease of $16,660
was the result of changes in the timing of expenses associated with sales and marketing efforts as compared to the same period
of the prior year.
Research
and development expense for the three months ended March 31, 2016 and 2015 was $17,248 and $25,007, respectively. The decrease
of $7,759 in expense was realized from expense reductions relating to the sale of its barcode technology business and completion
of certain research and development projects as compared to the same period of the prior year.
Other
Expenses, net
Other
expense for the three months ended March 31, 2016 and 2015, which includes primarily interest expense and financing costs, was
$51,658 and $122,339, respectively. The decrease of $70,681 was primarily a result of the reduction in debt balances and $21,000
of non-cash financing costs (see Note 7 to Condensed Consolidated Financial Statements) during the three months ended March 31,
2016 as compared to $76,500 of financing costs during the same period of the prior year.
Results
of Operations – Nine Months Ended March 31, 2016 compared to March 31, 2015
We
had a net loss of $1,293,937 and $556,902 for the nine months ended March 31, 2016 and 2015, respectively.
Revenues
Details
of revenues are as follows:
|
|
Nine Months Ended March 31,
|
|
Increase (Decrease)
|
|
|
2016
|
|
2015
|
|
$
|
|
%
|
Mobile Banking Technology
|
|
$
|
198,524
|
|
|
$
|
351,868
|
|
|
$
|
(153,344
|
)
|
|
|
(43.6
|
)
|
Barcode Technology
|
|
|
133,714
|
|
|
|
373,071
|
|
|
|
(239,357
|
)
|
|
|
(64.2
|
)
|
Other Revenue, related party
|
|
|
38,066
|
|
|
|
—
|
|
|
|
38,066
|
|
|
|
100.00
|
|
Total Revenues
|
|
$
|
370,304
|
|
|
$
|
724,939
|
|
|
$
|
(354,635
|
)
|
|
|
(48.9
|
)
|
Mobile
Banking Technology
Mobile
Banking Technology revenues include products such as the Company’s Blinx On-Off™ prepaid toggle Card and its Open
Loop/Close Loop System and Bio ID Card Platform. Mobile Banking Technology uses web-based mobile technology to offer financial
cardholders the very best technology in conducting secure financial transactions in real time, protecting personal identity, and
financial account security. Mobile Banking Technology revenues for the nine months ended March 31, 2016 and 2015 were $198,524
and $351,868, respectively. The decrease in Mobile Banking Technology revenues of $153,344 was due to a decrease in the number
of projects delivered during the period as compared to the same period of the prior year.
Barcode
Technology
On
September 30, 2015, the Company and The Matthews Group, a related party, entered into an Asset Purchase Agreement pursuant to
which the Company sold the intellectual property assets relating to its Barcode Technology.
The
Barcode Technology revenue before the sale to The Matthews Group increased approximately $48,000 to $133,714 during the three-months
ended September 30, 2015 compared to the three-months ended September 30, 2014 mainly attributable to the increase demand for
LCD screens.
Other
Revenue, related party
Effective
October 1, 2015, the Company entered into a management services agreement with the Matthews Group for which the Company will manage
all facets of its previous barcode technology business, on behalf of the Matthews Group, from October 1, 2015 to May 30, 2016.
Per the terms of the management services agreement, the Company earned 20% of all revenues, or $38,066, from the barcode technology
business during the nine months ended March 31, 2016.
Cost
of Sales
Cost
of sales for the nine months ended March 31, 2016 and 2015, totaled $250,310 and $253,739, respectively. The small decrease in
expense was the result of decreased labor costs associated with projects being implemented during the period as compared to the
same period of the prior year. For the nine months ended March 31, 2016 and 2015, cost of sales as a percentage of revenue were
67.6% and 35.0%, respectively.
Operating
Expenses
General
and administrative expense for the nine months ended March 31, 2016 and 2015 was $567,468 and $571,135, respectively.
Sales
and marketing expense for the nine months ended March 31, 2016 and 2015 was $16,641 and $61,856, respectively. The decrease of
$45,215 was the result of changes in the timing of expenses associated with sales and marketing efforts as compared to the same
period of the prior year.
Research
and development expense for the nine months ended March 31, 2016 and 2015 was $59,064 and $82,365, respectively. The decrease
of $23,301 in expense was realized from expense reductions relating to the sale of its barcode technology business and completion
of certain research and development projects as compared to the same period of the prior year.
Other
Expenses, net
Other
expense for the nine months ended March 31, 2016 and 2015, which includes primarily interest expense and financing costs, was
$770,758 and $312,746, respectively. The increase of $458,012 was primarily a result of $665,958 of non-cash financing costs (see
Note 7 to Condensed Consolidated Financial Statements) during the nine months ended March 31, 2016 as compared to $175,375 of
financing costs during the same period of the prior year.
Liquidity
Our
cash balance at March 31, 2016 decreased to $30,378 as compared to $52,762 at June 30, 2015. The decrease was the result of $585,630
in cash used in operating activities offset by $563,246 in cash provided by financing activities. Net cash used in operations
during the nine months ended March 31, 2016 was $585,630 compared with $51,662 of cash used in operations during the same period
of the prior year. Cash used in operations during the nine months ended March 31, 2016 was primarily due to our net loss in the
period of $1,293,937 offset by non-cash expenses of $835,754. Net cash provided by financing activities of $563,246 during the
nine months ended March 31, 2016 was primarily due to proceeds received from notes payable of $565,746 offset by payments of $2,500
on notes payable. During the same period of the prior year, net cash used in financing activities of $81,000 was from proceeds
received from notes payable of $224,500 offset by payments of $143,500 on notes payable.
The
accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern,
which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. During the nine
months ended March 31, 2016, the Company incurred a net loss of $1,293,937 and used cash to fund operating activities of $585,630,
and at March 31, 2016, the Company had a stockholders’ deficiency of $3,286,878. In addition, as of March 31, 2016, the
Company is delinquent in payment of $1,785,321 of its notes payable and is also delinquent in payment of $322,477 in payroll taxes
and accrued interest and penalties.
These
factors, among others, raise substantial doubt about our ability to continue as a going concern. The Company’s independent
registered public accounting firm, in its report on our June 30, 2015 financial statements, has raised substantial doubt about
the Company’s ability to continue as a going concern. The Company’s financial statements do not include any adjustments
that might result from the outcome of this uncertainty be necessary should we be unable to continue as a going concern.
The
Company believes its cash and forecasted cash flow from operations will not be sufficient to continue operations through fiscal
2016 without continued external investment. The Company believes it will require additional funds to continue its operations through
fiscal 2016 and to continue to develop its existing projects and plans to raise such funds by finding additional investors to
purchase the Company’s securities, generating sufficient sales revenue, implementing dramatic cost reductions or any combination
thereof. There is no assurance that the Company can be successful in raising such funds, generating the necessary sales or reducing
major costs. Further, if the Company is successful in raising such funds from sales of equity securities, the terms of these sales
may cause significant dilution to existing holders of common stock.
The
Company has traditionally been dependent on The Matthews Group, LLC, a related party, for its financial support. The Matthews
Group is owned 50% by Van Tran, the Company’s CEO/Executive Chair and a director, and 50% by Lawrence J. Johanns, a significant
Company stockholder.
Off-Balance
Sheet Arrangements
We
do not have any off-balance sheet arrangements.
Critical
Accounting Policies
Stock-Based
Compensation:
The
Company periodically issues stock options and warrants to employees and non-employees in capital raising transactions, for services
and for financing costs. Stock-based compensation for employees is measured at the grant date, based on the fair value of the
award, and is recognized as expense over the requisite service period. Options vest and expire according to terms established
at the grant date. The value of the stock compensation to non-employees is based upon the measurement date as determined at either
(a) the date at which a performance commitment is reached or (b) at the date at which the necessary performance to earn the equity
instruments is complete.
We
estimate volatility and forfeitures based upon historical data. As permitted by the authoritative guidance issued by the FASB,
we use the “simplified” method to determine the expected life of an option due to the Company’s lack of sufficient
historical exercise data to provide a reasonable basis, which is a result of the relative high turnover rates experienced in the
past for positions granted options. All of these variables have an effect on the estimated fair value of our share-based awards.
Revenue
Recognition:
The
Company accounts for revenue recognition in accordance with SEC Staff Accounting Bulletin (SAB) No. 101 "Revenue Recognition
in Financial Statements" and related amendments. Revenues for the Company are classified into four separate products; license
revenue (Veritec’s Multi-Dimensional matrix symbology), hardware revenue, identification card revenue, and debit card revenue.
Revenues from licenses, hardware, and identification cards are recognized when the product is shipped and collection is reasonably
assured. The process typically begins for license and hardware revenue with a customer purchase order detailing its hardware specifications
so the Company can import its software into the customer's hardware. Once importation is completed, if the customer only wishes
to purchase a license, the Company typically transmits the software to the customer via the Internet. Revenue is recognized at
that point. If the customer requests both license and hardware products, once the software is imported into the hardware and the
process is complete, the product is shipped and revenue is recognized at time of shipment. Once the software and/or hardware are
either shipped or transmitted, the customers do not have a right of refusal or return. Under some conditions, the customers remit
payment prior to the Company having completed importation of the software. In these instances, the Company delays revenue recognition
and reflects the prepayments as customer deposits.
The
process for identification cards begins when a customer requests, via the Internet, an identification card. The card is reviewed
for design and placement of the data, printed and packaged for shipment. At the time the identification cards are shipped and
collection is reasonably assured, revenue is recognized.
The
Company, as a processor and a distributor, recognizes revenue from transaction fees charged cardholders for the use of its issued
mobile debit cards. The fees are recognized on a monthly basis after all cardholder transactions have been summarized and reconciled
with third party processors.
Recent
Accounting Pronouncements
See
Footnote 4 of our condensed consolidated financial statements for a discussion of recently issued accounting standards.