ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results
of Operations – June 30, 2016 compared to June 30, 2015
We
had a net loss of $1,298,088 in the year ended June 30, 2016 compared to net loss of $907,474 in the year ended June 30, 2015.
Revenues
Details
of revenues are as follows:
|
|
Year
Ended June 30,
|
|
Increase
(Decrease)
|
|
|
2016
|
|
2015
|
|
$
|
|
%
|
|
|
|
|
|
|
|
|
|
Mobile
Banking Technology
|
|
$
|
478,239
|
|
|
$
|
437,847
|
|
|
$
|
40,392
|
|
|
|
9.2
|
|
Barcode Technology
(Sold September 30, 2015)
|
|
|
133,714
|
|
|
|
507,960
|
|
|
|
(374,246
|
)
|
|
|
(73.7
|
)
|
Other
revenue, related party
|
|
|
69,135
|
|
|
|
—
|
|
|
|
69,135
|
|
|
|
100.0
|
|
Total
Revenues
|
|
$
|
681,088
|
|
|
$
|
945,807
|
|
|
$
|
(264,719
|
)
|
|
|
(28.0
|
)
|
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 year ended June 30, 2016 and 2015 were $478,239 and $437,847,
respectively.
Barcode
Technology (Sold September 30, 2015)
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. Barcode Technology revenue for the
year ended June 30, 2016 represents the revenue earned from July 1, 2015 to September 30, 2015, the date it was sold.
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, 2017. Per the terms
of the management services agreement, the Company earned 20% of all revenues, or $69,135, from the barcode technology business
during the year ended June 30, 2016. No similar activity occurred during the same period of the prior year.
Cost
of Sales
Cost
of sales for the year ended June 30, 2016 and 2015, totaled $322,981 and $329,703, respectively. The slight decrease in expense
was the result of decreased labor costs associated with projects implemented during the period as compared to the same period
of the prior year. As a percentage of revenue, for the year ended June 30, 2016, cost of sales was 47.4% compared to 34.9% for
the year ended June 30, 2015.
Operating
Expenses
General
and administrative expenses for the year ended June 30, 2016 were $707,856, compared to $841,816 for year ended June 30, 2015,
a decrease of $133,960. The decrease was primarily from decreased salaries, benefits and professional fees.
Sales
and marketing expense for the year ended June 30, 2016 was $19,631 compared to $83,863 for the year ended June 30, 2015, a decrease
of $64,232. The decrease of $64,232 in expense was realized from expense reductions relating to the sale of its barcode technology
business as compared to the same period of the prior year.
Research
and development expense for the year ended June 30, 2016 totaled $68,794 compared to $98,412 for the year ended June 30, 2015,
a decrease of $29,618. The decrease of $29,618 in expense was realized from expense reductions relating to the completion of certain research and development projects as compared to the same period of the prior year.
Other
Expenses, net
Other
expense for the year ended June 30, 2016 and 2015, which includes primarily interest expense and financing costs, was $859,914
and $499,487, respectively. The increase of $360,427 was primarily a result of increased non-cash financing costs (see Note 7
to Consolidated Financial Statements) during the year ended June 30, 2016 as compared to the same period of the prior year.
Capital
Expenditures and Commitments
No
capital purchases were made during fiscal 2016 and 2015.
Liquidity
Our
cash balance at June 30, 2016 increased to $60,953 as compared to $52,762 at June 30, 2015. The increase was the result of $812,094
in cash used in operating activities offset by $820,285 in cash provided by financing activities. Net cash used in operations
during the year ended June 30, 2016 was $812,094 compared with $192,903 of net cash used in operations during the same period
of the prior year. Cash used in operations during the year ended June 30, 2016 was primarily due to our net loss in the period
of $1,298,088 offset by non-cash expenses of $941,055. Net cash provided by financing activities of $820,285 during the year ended
June 30, 2016 was primarily due to proceeds received from notes payable of $822,785 offset by payments of $2,500 on notes payable.
During the same period of the prior year, net cash provided by financing activities of $221,000 was from proceeds received from
notes payable of $365,000 offset by payments of $144,000 on notes payable.
The
accompanying 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 year ended
June 30, 2016, the Company incurred a net loss of $1,298,088 and used cash to fund operating activities of $812,094, and at June
30, 2016, the Company had a stockholders’ deficiency of $3,233,172. In addition, as of June 30, 2016, the Company is delinquent
in payment of $2,032,595 of its notes payable and is also delinquent in payment of $238,718 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, 2016 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
2017 without continued external investment. The Company believes it will require additional funds to continue its operations through
fiscal 2017 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.
Commitments
and Contractual Obligations
The
Company has one annual lease commitment of $50,400 for the corporate office building, which is leased from Ms. Tran, our chief
executive officer, which expired on June 30, 2015, and was automatically extended until June 30, 2017. The commitment is for the
corporate offices at 2445 Winnetka Avenue North, Golden Valley, Minnesota. The total amount of the remaining one-year lease commitment
is $50,400.
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. The Company accounts for stock option and stock warrant grants to employees based on the authoritative
guidance provided by the Financial Accounting Standards Board where the value of the award is measured on the date of grant and
recognized over the vesting period. The Company accounts for stock option and stock warrant grants to non-employees in accordance
with the authoritative guidance of the Financial Accounting Standards Board where the value of the stock compensation is determined
based upon the measurement date 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. Non-employee stock-based compensation charges generally
are amortized over the vesting period on a straight-line basis. In certain circumstances where there are no future performance
requirements by the non-employee, option or warrant grants are immediately vested and the total stock-based compensation charge
is recorded in the period of the measurement date.
The
fair value of the Company’s common stock option and warrant grants are estimated using a Black-Scholes option pricing model,
which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the common stock options,
and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes option pricing model,
and based on actual experience. The assumptions used in the Black-Scholes option pricing model could materially affect compensation
expense recorded in future periods.
Revenue
Recognition
The
Company accounts for revenue recognition in accordance with guidance of the Financial Accounting Standards Board. Revenues for
the Company are classified into barcode technology revenue and mobile banking technology revenue.
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. The process typically begins with a customer purchase order detailing
its 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, 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 other
products 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
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.
Recently
Issued Accounting Standards
See
Footnote 1 of consolidated financial statements for a discussion of recently issued accounting standards.
ITEM
8. FINANCIAL STATEMENTS
VERITEC,
INC. AND SUBSIDIARIES
CONSOLIDATED
FINANCIAL STATEMENTS
FISCAL
YEARS ENDED JUNE 30, 2016 AND 2015
TABLE
OF CONTENTS
|
|
PAGE
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
|
15
|
|
CONSOLIDATED
BALANCE SHEETS
|
|
16
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
17
|
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' DEFICIENCY
|
|
18
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
19
|
|
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
21
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Board of Directors and Stockholders
Veritec,
Inc. and Subsidiaries
Golden
Valley, Minnesota
We
have audited the accompanying consolidated balance sheets of Veritec, Inc. and Subsidiaries (the “Company”) as of
June 30, 2016 and 2015, and the related consolidated statements of operations, stockholders’ deficiency and cash flows for
the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility
is to express an opinion on these consolidated financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating
the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of Veritec, Inc. and Subsidiaries as of June 30, 2016 and 2015, and the results of their operations and their cash flows for the
years then ended in conformity with accounting principles generally accepted in the United States of America.
The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.
As discussed in Note 2 to the consolidated financial statements, the Company has had recurring losses from operations and had
a stockholders’ deficiency as of June 30, 2016. These conditions raise substantial doubt about the Company’s ability
to continue as a going concern. Management’s plans in regards to these matters are also described in Note 2 to the consolidated
financial statements. The accompanying consolidated financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
/s/
Weinberg & Company, P.A.
Weinberg
& Company, P.A.
Los
Angeles, California
September
26, 2016
VERITEC,
INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2016 AND 2015
|
|
As
of June 30,
|
|
|
2016
|
|
2015
|
ASSETS
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
60,953
|
|
|
$
|
52,762
|
|
Accounts
receivable
|
|
|
9,309
|
|
|
|
38,749
|
|
Inventories
|
|
|
—
|
|
|
|
14,461
|
|
Prepaid
expenses
|
|
|
1,897
|
|
|
|
18,234
|
|
Total
Current Assets
|
|
|
72,159
|
|
|
|
124,206
|
|
Restricted
cash
|
|
|
—
|
|
|
|
63,029
|
|
Property
and equipment, net
|
|
|
171
|
|
|
|
583
|
|
Intangibles,
net
|
|
|
80,208
|
|
|
|
144,375
|
|
Total
Assets
|
|
$
|
152,538
|
|
|
$
|
332,193
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ DEFICIENCY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Notes
payable
|
|
$
|
548,384
|
|
|
$
|
521,610
|
|
Notes
payable, related party
|
|
|
1,484,211
|
|
|
|
3,041,097
|
|
Accounts
payable
|
|
|
624,153
|
|
|
|
630,490
|
|
Accounts
payable, related party
|
|
|
96,110
|
|
|
|
96,110
|
|
Customer
deposits
|
|
|
25,000
|
|
|
|
25,482
|
|
Deferred
revenues
|
|
|
138,760
|
|
|
|
492,603
|
|
Payroll
tax liabilities
|
|
|
238,718
|
|
|
|
453,277
|
|
Accrued
expenses
|
|
|
75,374
|
|
|
|
22,957
|
|
Total
Current Liabilities
|
|
|
3,230,710
|
|
|
|
5,283,626
|
|
Contingent
earnout liability
|
|
|
155,000
|
|
|
|
155,000
|
|
Total
Liabilities
|
|
|
3,385,710
|
|
|
|
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 June 30, 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 June 30,
2016 and June 30, 2015, respectively
|
|
|
395,380
|
|
|
|
165,301
|
|
Common
stock to be issued, 145,000 shares and 940,000 shares, as of June 30, 2016 and June 30, 2015, respectively
|
|
|
12,500
|
|
|
|
51,800
|
|
Additional
paid-in capital
|
|
|
17,939,576
|
|
|
|
14,959,006
|
|
Accumulated
deficit
|
|
|
(21,581,628
|
)
|
|
|
(20,283,540
|
)
|
Total
Stockholders' Deficiency
|
|
|
(3,233,172
|
)
|
|
|
(5,106,433
|
)
|
Total
Liabilities and Stockholders’ Deficiency
|
|
$
|
152,538
|
|
|
$
|
332,193
|
|
The
accompanying notes are an integral part of these consolidated financial statements
VERITEC,
INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEARS ENDED JUNE 30, 2016 AND 2015
|
|
Fiscal
Year Ended June 30,
|
|
|
2016
|
|
2015
|
Revenue:
|
|
|
|
|
|
|
|
|
Mobile
banking technology revenue
|
|
$
|
478,239
|
|
|
$
|
437,847
|
|
Barcode
technology revenue
|
|
|
133,714
|
|
|
|
507,960
|
|
Other
revenue, related party
|
|
|
69,135
|
|
|
|
—
|
|
Total
revenue
|
|
|
681,088
|
|
|
|
945,807
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
322,981
|
|
|
|
329,703
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
358,107
|
|
|
|
616,104
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
707,856
|
|
|
|
841,816
|
|
Sales
and marketing
|
|
|
19,631
|
|
|
|
83,863
|
|
Research
and development
|
|
|
68,794
|
|
|
|
98,412
|
|
Total
operating expenses
|
|
|
796,281
|
|
|
|
1,024,091
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(438,174
|
)
|
|
|
(407,987
|
)
|
|
|
|
|
|
|
|
|
|
Other
Expense:
|
|
|
|
|
|
|
|
|
Interest
expense and financing costs, including $832,914 and $152,501, respectively, to related parties
|
|
|
(859,914
|
)
|
|
|
(499,487
|
)
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(1,298,088
|
)
|
|
$
|
(907,474
|
)
|
Net
Loss Per Common Share - Basic and diluted
|
|
$
|
(0.04
|
)
|
|
$
|
(0.06
|
)
|
Weighted
Average Number of Shares Outstanding - Basic and diluted
|
|
|
33,738,751
|
|
|
|
16,351,956
|
|
The
accompanying notes are an integral part of these consolidated financial statements
VERITEC,
INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIENCY
FOR
THE FISCAL YEARS ENDED JUNE 30, 2016 AND 2015
|
|
|
Preferred
Stock
|
|
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
|
Amount
|
|
|
|
Shares
|
|
|
|
Amount
|
|
|
|
Common
Stock to be Issued
|
|
|
|
Additional
Paid-In Capital
|
|
|
|
Accumulated
Deficit
|
|
|
|
Stockholders’
Deficiency
|
|
BALANCE, July 1, 2014
|
|
|
1,000
|
|
|
$
|
1,000
|
|
|
|
15,920,088
|
|
|
$
|
159,201
|
|
|
$
|
39,596
|
|
|
$
|
14,594,181
|
|
|
$
|
(19,376,066
|
)
|
|
$
|
(4,582,088
|
)
|
Shares issued for acquisition
|
|
|
—
|
|
|
|
—
|
|
|
|
250,000
|
|
|
|
2,500
|
|
|
|
—
|
|
|
|
35,000
|
|
|
|
—
|
|
|
|
37,500
|
|
Shares issued for services
|
|
|
—
|
|
|
|
—
|
|
|
|
135,000
|
|
|
|
1,350
|
|
|
|
9,300
|
|
|
|
8,950
|
|
|
|
—
|
|
|
|
19,600
|
|
Shares issued for common
stock issuable
|
|
|
—
|
|
|
|
—
|
|
|
|
225,000
|
|
|
|
2,250
|
|
|
|
(25,250
|
)
|
|
|
23,000
|
|
|
|
—
|
|
|
|
—
|
|
Stock based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
28,154
|
|
|
|
—
|
|
|
|
—
|
|
|
|
28,154
|
|
Beneficial conversion
feature on issuance of convertible notes payable
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
297,875
|
|
|
|
—
|
|
|
|
297,875
|
|
Net
Loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(907,474
|
)
|
|
|
(907,474
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, June 30, 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
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
135,045
|
|
|
|
—
|
|
|
|
135,045
|
|
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
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,298,088
|
)
|
|
|
(1,298,088
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
June 30, 2016
|
|
|
1,000
|
|
|
$
|
1,000
|
|
|
|
39,538,007
|
|
|
$
|
395,380
|
|
|
$
|
12,500
|
|
|
$
|
17,939,576
|
|
|
$
|
(21,581,628
|
)
|
|
$
|
(3,233,172
|
)
|
The
accompanying notes are an integral part of these consolidated financial statements
VERITEC,
INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED JUNE 30, 2016 AND 2015
|
|
Fiscal
Years Ended Juned 30,
|
|
|
2016
|
|
2015
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(1,298,088
|
)
|
|
$
|
(907,474
|
)
|
Adjustments
to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
412
|
|
|
|
411
|
|
Amortization
|
|
|
64,167
|
|
|
|
48,125
|
|
Allowance
for inventory obsolescence
|
|
|
14,461
|
|
|
|
—
|
|
Shares
to be issued for services
|
|
|
2,100
|
|
|
|
19,600
|
|
Stock
based compensation expense
|
|
|
—
|
|
|
|
28,154
|
|
Beneficial
conversion feature on convertible notes payable
|
|
|
135,045
|
|
|
|
297,875
|
|
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
|
|
|
136,100
|
|
|
|
199,489
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(11,623
|
)
|
|
|
31,751
|
|
Restricted
cash
|
|
|
63,029
|
|
|
|
(11,072
|
)
|
Inventories
|
|
|
—
|
|
|
|
(6,632
|
)
|
Prepaid
expenses
|
|
|
16,337
|
|
|
|
(1,091
|
)
|
Deferred
revenues
|
|
|
(353,843
|
)
|
|
|
233,839
|
|
Payroll
tax liabilities
|
|
|
(214,559
|
)
|
|
|
(85,941
|
)
|
Customer
deposit
|
|
|
(482
|
)
|
|
|
(65,778
|
)
|
Accounts
payables and accrued expenses
|
|
|
46,080
|
|
|
|
25,842
|
|
Net
cash used in operating activities
|
|
|
(812,094
|
)
|
|
|
(192,903
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds
from notes payable, related party
|
|
|
822,785
|
|
|
|
365,000
|
|
Payment
on notes payable, related party
|
|
|
(2,500
|
)
|
|
|
(144,000
|
)
|
Net
cash provided by financing activities
|
|
|
820,285
|
|
|
|
221,000
|
|
|
|
|
|
|
|
|
|
|
NET
INCREASE IN CASH
|
|
|
8,191
|
|
|
|
28,097
|
|
|
|
|
|
|
|
|
|
|
CASH
AT BEGINNING OF YEAR
|
|
|
52,762
|
|
|
|
24,665
|
|
|
|
|
|
|
|
|
|
|
CASH
AT END OF YEAR
|
|
$
|
60,953
|
|
|
$
|
52,762
|
|
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
|
|
|
$
|
—
|
|
Related
party accounts receivable offset to related party notes payable
|
|
$
|
41,063
|
|
|
$
|
—
|
|
Conversion
of notes payable into common stock
|
|
$
|
1,775,434
|
|
|
$
|
—
|
|
Common
stock issued for acquisition
|
|
$
|
—
|
|
|
$
|
37,500
|
|
Contingent
earnout liability from acquisition
|
|
$
|
—
|
|
|
$
|
155,000
|
|
The
accompanying notes are an integral part of these consolidated financial statements
VERITEC,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE FISCAL YEARS ENDED JUNE 30, 2016 AND 2015
NOTE
1 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The
Company
Veritec,
Inc. (Veritec) was formed in the State of Nevada on September 8, 1982. Veritec’s wholly owned subsidiaries include, Vcode
Holdings, Inc. (Vcode®), and Veritec Financial Systems, Inc. (VTFS) (collectively the “Company”).
Nature
of Business
The
Company is primarily engaged in the development, marketing, sales and licensing of products and rendering of professional services
related to its mobile banking solutions. Prior to its sale on September 30, 2015, the Company was also focused on its proprietary
two-dimensional matrix symbology (also commonly referred to as “two-dimensional barcodes” or “2D barcodes”).
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. In 2009 through 2016, the Company has had agreements with various banks, including Security First Bank (terminated
in October 2010), Palm Desert National Bank (which was later assigned to First California Bank and subsequently Pacific Western
Bank that terminated in June 2013), and Central Bank of Kansas City. Late in the fiscal year ended June 30, 2016, the relationship
between CBKC and the Company ended and the Company is currently seeking a bank to sponsor its Prepaid Card programs (see Note
12). As a Cardholder Independent Sales Organization, Veritec is able to promote and sell Visa branded card programs. As a Third-Party
Servicer, Veritec provides back-end cardholder transaction processing services for Visa branded card programs on behalf of its
sponsoring bank.
On
September 30, 2014, Veritec and Tangible Payments LLC entered into an Asset Purchase Agreement pursuant to which Veritec acquired
certain assets and liabilities of the Tangible Payments LLC (See Note 5).
The
Company has a portfolio of five United States and eight foreign patents. In addition, we have seven U.S. and twenty-eight
foreign pending patent applications.
Barcode
Technology (Sold September 30, 2015)
The
Company’s Barcode Technology was originally invented by the founders of Veritec and as a product identification system for
identification and tracking of manufactured parts, components and products mostly in the liquid crystal display (LCD) markets
and is ideal for secure identification documents, financial cards, medical records and other high security applications. Veritec
developed software to send, store, display, and read Barcode Technology on a mobile phone. On September 30, 2015, the Company
sold all of its assets of its Barcode Technology, which was comprised solely of its intellectual property. The sale allows the
Company to focus its efforts solely on its growing Mobile Banking Technology (See Note 6).
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 June 30, 2016, the JV has not received funding and anticipates receipt of
funding in fiscal year 2017.
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Intercompany
transactions and balances were eliminated in consolidation.
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 instruments issued for services.
Accounts
Receivable
The
Company sells to domestic and foreign companies and grants uncollateralized credit to customers, but requires deposits on unique
orders. Management periodically reviews its accounts receivable and provides an allowance for doubtful accounts after analyzing
the age of the receivable, payment history and prior experience with the customer. The estimated loss that management believes
is probable is included in the allowance for doubtful accounts.
While
the ultimate loss may differ, management believes that any additional loss will not have a material impact on the Company's financial
position. Due to uncertainties in the settlement process, however, it is at least reasonably possible that management's estimate
will change during the near term.
Inventories
Inventories,
consisting of purchased components for resale, are stated at the lower of cost or market, applying the first-in, first-out (FIFO)
method. Inventory is net of reserves of $38,361 and $23,900 at June 30, 2016 and 2015, respectively.
Property
and Equipment
Property
and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over estimated
useful lives of 3 to 7 years. When assets are retired or otherwise disposed, the cost and related accumulated depreciation are
removed from the accounts and the resulting gain or loss is recognized. Maintenance and repairs are expensed as incurred; significant
renewals and betterments are capitalized.
Management regularly reviews property, equipment and other long-lived assets for possible impairment. This review occurs quarterly,
or more frequently if events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. If
there is indication of impairment, management prepares an estimate of future cash flows (undiscounted and without interest charges)
expected to result from the use of the asset and its eventual disposition. If these cash flows are less than the carrying amount
of the asset, an impairment loss is recognized to write down the asset to its estimated fair value. Based upon management’s
assessment, there were no indicators of impairment at June 30, 2016 or 2015.
Concentrations
The
Company’s cash balances on deposit with banks are guaranteed by the Federal Deposit Insurance Corporation up to $250,000.
The Company may be exposed to risk for the amounts of funds held in one bank in excess of the insurance limit. In assessing the
risk, the Company’s policy is to maintain cash balances with high quality financial institutions. The Company did not have
cash balances in excess of the guarantee during the year ended June 30, 2016.
Major
Customers
:
The
Company has two customers in fiscal 2016 that represented an aggregate of 47% (37% and 10%) of our revenue, and two customers
in 2015 that represented 23% (12% and 11%) of our revenue.
As
of June 30, 2016, the Company had approximately $3,520 (38%), $1,500 (16%), $1,200 (13%), $1,000 (11%) and $1,000 (11%) of accounts
receivable due from certain 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 certain customers.
Foreign
Revenues
Foreign
revenues accounted for 19% of the Company’s total revenues in fiscal 2016 and 41% in fiscal 2015. (6% Korea, 8% Taiwan,
and 5% others in fiscal 2016 and 10% Korea, 21% Taiwan, and 10% others in fiscal 2015).
Fair
Value of Financial Instruments
Fair
Value Measurements are adopted by the Company based on the authoritative guidance provided by the Financial Accounting Standards
Board, with the exception of the application of the statement to non-recurring, non-financial assets and liabilities as permitted.
The adoption based on the authoritative guidance provided by the Financial Accounting Standards Board did not have a material
impact on the Company's fair value measurements. Based on the authoritative guidance provided by the Financial Accounting Standards
Board defines fair value 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. FASB authoritative guidance establishes a fair value hierarchy, 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 that are observable either directly or indirectly.
Level
3 - Unobservable inputs based on the Company's assumptions.
The
Company had no such assets or liabilities recorded to be valued on the basis above at June 30, 2016 or 2015.
For
certain financial instruments, the carrying amounts reported in the consolidated balance sheets for cash and cash equivalents,
accounts receivable, and current liabilities, including notes payable and convertible notes, each qualify as financial instruments
and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments
and their expected realization and their current market rates of interest.
Revenue
Recognition
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. The process typically begins with a customer purchase order detailing
its 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, 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 other
products 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
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.
Shipping
and Handling Fees and Costs
For
the years ended June 30, 2016 and 2015, shipping and handling fees billed to customers of $216 and $997, respectively were included
in revenues and shipping and handling costs of $3,089 and $997, respectively were included in cost of sales.
Research
and Development
Research
and development costs were expensed as incurred.
Advertising
Advertising
costs are expensed as incurred and are included in sales and marketing expense in the amount of $1,100 and $2,100 for the years
ended June 30, 2016 and 2015, respectively.
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 as their effect is antidilutive.
For
the years ended June 30, 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 June 30, 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.
|
|
June
30,
|
|
|
2016
|
|
2015
|
Series
H Preferred Stock
|
|
|
10,000
|
|
|
|
10,000
|
|
Convertible
Notes Payable
|
|
|
11,815,803
|
|
|
|
19,563,168
|
|
Options
|
|
|
2,510,000
|
|
|
|
2,520,000
|
|
Total
|
|
|
14,335,803
|
|
|
|
22,093,168
|
|
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. The Company accounts for stock option and stock warrant grants to employees based on the authoritative
guidance provided by the Financial Accounting Standards Board (FASB) where the value of the award is measured on the date of grant
and recognized over the vesting period. The Company accounts for stock option and stock warrant grants to non-employees in accordance
with the authoritative guidance of the FASB where the value of the stock compensation is determined based upon the measurement
date 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. Non-employee stock-based compensation charges generally are amortized over the vesting
period on a straight-line basis. In certain circumstances where there are no future performance requirements by the non-employee,
option or warrant grants are immediately vested and the total stock-based compensation charge is recorded in the period of the
measurement date.
The
fair value of the Company’s common stock option and warrant grants are estimated using a Black-Scholes option pricing model,
which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the common stock options,
and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes option pricing model,
and based on actual experience. The assumptions used in the Black-Scholes option pricing model could materially affect compensation
expense recorded in future periods.
Intangible
Assets
The
Company accounts for intangible assets in accordance with the authoritative guidance issued by the FASB. Intangibles are valued
at their fair market value and are amortized taking into account the character of the acquired intangible asset and the expected
period of benefit. The Company evaluates intangible assets for impairment, at a minimum, on an annual basis and whenever events
or changes in circumstances indicate that the carrying value may not be recoverable from its estimated undiscounted future cash
flows. Recoverability of intangible assets is measured by comparing their net book value to the related projected undiscounted
cash flows from these assets, considering a number of factors, including past operating results, budgets, economic projections,
market trends and product development cycles. If the net book value of the asset exceeds the related undiscounted cash flows,
the asset is considered impaired, and a second test is performed to measure the amount of impairment loss.
At
June 30, 2016, the intangibles assets of $80,208 relates to our acquisition of Tangible Payments LLC during fiscal year 2015 (see
Note 5). Management believes there were no indications of impairment based on management’s assessment of these assets at
June 30, 2016. Factors we consider important that could trigger an impairment review include significant underperformance relative
to historical or projected future operating results, significant changes in the manner of the use of our assets or the strategy
for our overall business, and significant negative industry or economic trends. If current economic conditions worsen causing
decreased revenues and increased costs, we may have to record an impairment to our intangible assets.
Income
Taxes
The
Company accounts for income taxes using the asset and liability method whereby deferred tax assets are recognized for deductible
temporary differences, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are
the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by
a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred
tax assets will be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates
on the date of enactment.
Recently
Issued Accounting Standards
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 Accounting Standards Update (ASU) No. 2016-02,
Leases
. ASU 2016-02 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. 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. The Company is currently evaluating the expected impact that the standard could have on its financial statements
and related disclosures.
In
March 2016, the FASB issued the ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting
. The amendments
in this ASU require, among other things, that all income tax effects of awards be recognized in the income statement when the
awards vest or are settled. The ASU also allows for an employer to repurchase more of an employee's shares than it can today for
tax withholding purposes without triggering liability accounting and allows for a policy election to account for forfeitures as
they occur. The amendments in this ASU are effective for fiscal years beginning after December 15, 2016, including interim periods
within those fiscal years. Early adoption is permitted for any entity in any interim or annual period. The Company is currently
evaluating the expected impact that the standard could have on its financial statements and related disclosures.
In
August 2014, the FASB issued Accounting Standards Update No. 2014-15,
Disclosure of Uncertainties about an Entity’s Ability
to Continue as a Going Concern
, which provides guidance on determining when and how to disclose going-concern uncertainties
in the financial statements. ASU 2014-15 requires management to perform interim and annual assessments of an entity’s ability
to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain
disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. ASU
2014-15 is effective for annual periods ending after December 15, 2016, and interim periods thereafter. Early adoption is permitted.
The Company is currently evaluating the expected impact that the standard could have on its 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
2 - GOING CONCERN
The
accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. The Company
experienced a loss of $1,298,088 during the year ended June 30, 2016, and at June 30, 2016, the Company had a working capital
deficit of $3,158,551 and a stockholders’ deficiency of $3,233,172. The Company is in default of $2,032,595 of its note
payable obligations and is also delinquent in payment of certain amounts due of $238,718 for payroll taxes and accrued interest
and penalties as of June 30, 2016. These and other factors raise substantial doubt about the Company's ability to continue as
a going concern. The financial statements do not include any adjustments that might be necessary should the Company be unable
to continue as a going concern.
The
Company believes it will require additional funds to continue its operations through fiscal 2017 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 consolidated financial statements do not include any adjustments that may result from this uncertainty.
NOTE
3 – RESTRICTED CASH
The
Company entered into Store Value Prepaid Card Sponsorship Agreements with certain banks whereas the Company markets and sells
store value prepaid card 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 was required to establish a reserve account controlled
by the bank. During fiscal year 2016, the agreement with the bank was terminated. At June 30, 2016 and 2015, the restricted cash
totaled $0 and $63,029, respectively. Since this amount was restricted for the purposes related to the programs, it was classified
as restricted cash on the consolidated balance sheets as of June 30, 2015.
NOTE
4 - PROPERTY AND EQUIPMENT
Property
and equipment consists of the following as of:
|
|
June
30,
|
|
|
2016
|
|
2015
|
Furniture
and equipment
|
|
$
|
140,316
|
|
|
$
|
140,316
|
|
Software
|
|
|
73,000
|
|
|
|
73,000
|
|
Vehicles
|
|
|
23,301
|
|
|
|
23,301
|
|
|
|
|
236,617
|
|
|
|
236,617
|
|
Less
accumulated depreciation
|
|
|
(236,446
|
)
|
|
|
(236,034
|
)
|
Total
|
|
$
|
171
|
|
|
$
|
583
|
|
Depreciation
expense for the years ended June 30, 2016 and 2015 was $412 and $411, respectively.
NOTE
5 – INTANGIBLE ASSETS AND CONTINGENT EARNOUT LIABILITY
On
September 30, 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 the Tangible Payments LLC. Tangible Payments
LLC developed online payment technology that encrypts sensitive information securely between customers and merchants during online
transactions.
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. For the years ended June 30, 2016 and 2015, there was no net profit derived from the acquired assets
and accordingly, no payments were made on the earnout.
The
Company assigned $192,500 of the purchase price to contract commitments which will be amortized over a three year period. As
of June 30, 2016 and 2015, the unamortized balance of contract commitments was $80,208 and $144,375, respectively. For the
years ended June 30, 2016 and 2015, the Company recorded $64,167 and $48,125 of amortization expense related to this
intangible which is included in general and administrative expense in the Consolidated Statements of Operations.
Total
estimated amortization expense with respect to intangible assets for 2017 through 2018 is as follows:
Years
Ending June 30,
|
|
Amount
|
|
2017
|
|
|
$
|
64,167
|
|
|
2018
|
|
|
|
16,041
|
|
|
Total
|
|
|
$
|
80,208
|
|
The
following table presents our unaudited pro forma combined historical results of operations as if we had consummated the acquisition
as of July 1, 2014.
|
|
Year
Ended
June
30, 2015
|
|
|
(Unaudited)
|
|
|
|
|
|
Revenues
|
|
$
|
1,007,932
|
|
Net
Loss
|
|
$
|
(919,775
|
)
|
NOTE
6 – RELATED PARTY TRANSACTIONS
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. The Company has relied on The Matthews Group, LLC for funding (see Note 7).
At
various times throughout the Company’s history, the Company received various unsecured, non-interest bearing, due on demand
advances from its Chief Executive Officer, Ms. Van Tran, a related party. The balances due Ms. Tran as of June 30, 2016 and 2015
were $96,110 and $96,110, respectively. These advances have been classified as accounts payable, related party on the accompanying
consolidated balance sheets.
The
Company leases its office facilities from Ms. Tran. For the year ended June 30, 2016 and 2015, rental payments to Ms. Van Tran
totaled $50,400 and $50,400, respectively.
On
September 30, 2015, the Company agreed to convert $1,775,434 of various convertible notes payable to The Matthews Group into 22,192,919
shares of common stock, or $0.08 per share (see Note 7). The transaction included $702,797 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.
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 (see Note 7). 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.
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)
(see Note7). 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 year ended June 30, 2016, the Company issued $549,389 of convertible notes payable to The Matthews Group and $25,000 of convertible
notes payable to Van Tran (see Note 7). 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 $135,045 which is included in interest expense.
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 $69,135, from the barcode
technology operations through May 30, 2017. Additionally all cash flow (all revenues collected less direct costs paid) will be
retained by the Company and classified as unsecured note payable-related party, due on demand, bearing interest at 10% per annum.
At June 30, 2016, the total of note payable-related party related to this agreement, including interest of $9,315, was $260,711
(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.
NOTE
7 – NOTES PAYABLE
Notes
payable includes accrued interest and consists of the following as of June 30, 2016 and June 30, 2015:
|
|
|
|
|
|
|
June
30,
2016
|
|
June
30, 2015
|
Convertible
notes payable,
including $1,264,563 and $2,326,609 due to related
parties at June 30, 2016 and June 30, 2015, respectively. At June 30, 2016, $1,460,218 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 2011 or on demand. The principal and accrued interest are convertible at conversion
prices ranging from $0.08 per share to $0.40 per share.
At June 30, 2015, the balance of convertible notes and
accrued interest was $2,512,267. During the year ended June 30, 2016, $574,389 of convertible notes-related party were
issued (see
Note 6), $2,500 of convertible notes were paid off, and $101,745 of accrued interest was added to principal. On
September 30, 2015, $1,103,691 of outstanding balances due to related parties were converted into shares of common stock and
$620,570 was settled upon the sale of assets. (see Note 6).
|
|
$
|
1,460,218
|
|
|
$
|
2,512,267
|
|
|
|
|
|
|
|
|
|
|
Notes
payable,
including $219,648 and $714,488 due to related parties at June 30, 2016 and June
30, 2015, respectively. The notes are both secured by the Company’s intellectual property, and unsecured, interest at
0% to 10%, and due on various dates through 2012 or on demand. At June 30, 2016, $352,729 of notes payable due to unrelated
parties are in default.
At June 30, 2015, the balance of notes payable and accrued interest was $1,049,740.
During the year ended June 30, 2016, the Company received $248,396 of loans from the The Matthews Group related to the sale
of the Company’s Barcode technology to The Matthews Group (see Note 6), and $34,355 of accrued interest was added to
principal. On September 30, 2015, $671,743 of outstanding balance due to related parties were converted into shares of
common
stock and $49,430 was settled upon the sale of assets. (see Note 6). In addition, at June 30, 2016, related party accounts
receivable of $41,063 are shown as a reduction to related party notes payable.
|
|
|
572,377
|
|
|
|
1,049,740
|
|
Total
|
|
$
|
2,032,595
|
|
|
$
|
3,562,707
|
|
During
the years ended June 30, 2016 and 2015, the Company recorded interest expense on its convertible notes payable and notes payable
of $271,145 (including $135,045 beneficial conversion feature that was expensed) and $199,489, respectively.
For
the purposes of Balance Sheet presentation notes payable have been presented as follows:
|
|
|
June
30, 2016
|
|
|
|
June
30, 2015
|
|
Notes
payable
|
|
$
|
548,384
|
|
|
$
|
521,610
|
|
Notes
payable, related party
|
|
|
1,484,211
|
|
|
|
3,041,097
|
|
Total
|
|
$
|
2,032,595
|
|
|
$
|
3,562,707
|
|
NOTE
8 - STOCKHOLDERS’ DEFICIENCY
Preferred
Stock
The
articles of incorporation of Veritec authorize 10,000,000 shares of preferred stock with a par value of $1.00 per share. The Board
of Directors is authorized to determine any number of series into which shares of preferred stock may be divided and to determine
the rights, preferences, privileges and restrictions granted to any series of the preferred stock.
In
1999, a new Series H convertible preferred stock was authorized. Each share of Series H convertible preferred stock is convertible
into 10 shares of the Veritec’s common stock at the option of the holder. As of June 30, 2016 and 2015, there were 1,000
shares of Series H convertible preferred stock issued and outstanding.
Common
Stock
Shares
issued to consultants for services
During
the year ended June 30, 2015, the Company granted and issued 135,000 shares of common stock for services received. The common
shares, based on the fair value on the dates granted, were valued at $0.05 to $0.51 per share, for an aggregate of $19,600.
Common
Stock to be issued
Shares
to be issued to consultants for services rendered
During
the year ended June 30, 2015, the Company recorded an obligation to issue 55,000 shares of common stock with an aggregate fair
value of $8,150 of which 5,000 shares of common stock were issued in December 2014. As of June 30, 2015, the remaining 50,000
shares of common stock with a value of $7,400
were not issued and were reflected as common shares to be issued in the accompanying
consolidated balance sheet. The shares were issued in December 2015.
During
the year ended June 30, 2015, the Company recorded an obligation to issue 35,000 shares of common stock with an aggregate fair
value of $4,050 of which 20,000 shares of common stock were issued in December 2014. As of June 30, 2015, the remaining 15,000
shares of common stock with a value of $1,900 had not been issued and were reflected as common shares to be issued in the accompanying
consolidated balance sheet. The shares were issued in December 2015.
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. 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. The consulting agreement
was terminated on October 31, 2015. During the year ended June 30, 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 June 30, 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.
Shares
to be issued to directors and employees for services
During
the year ended June 30, 2012, the Company granted an aggregate of 75,000 shares of the Company’s common stock to the Company’s
directors for services rendered and recognized as stock based compensation expense during the year ended June 30, 2012 based on
their fair value at grant dates in the aggregate amount of $3,000. The shares due were not issued as of June 30, 2016 and were
reflected as common shares to be issued in the accompanying consolidated balance sheet.
During
the year ended June 30, 2015, the Company granted an aggregate of 750,000 shares of the Company’s common stock to four of
the Company’s directors and certain employees for services rendered and recognized as stock based compensation expense during
the year ended June 30, 2015 based on their fair value at grant dates in the aggregate amount of $28,154. The shares due were
not issued as of June 30, 2015 and were reflected as common shares to be issued in the accompanying consolidated balance sheet.
The shares were issued in December 2015.
NOTE
9 – STOCK OPTIONS
A
summary of stock options as of June 30, 2016 and for the two years then ended is as follows:
|
|
Number
of
|
|
Weighted
- Average
|
|
|
Shares
|
|
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at June 30, 2014
|
|
|
|
3,056,500
|
|
|
$
|
0.08
|
|
|
Granted
|
|
|
|
—
|
|
|
|
—
|
|
|
Forfeited
|
|
|
|
(536,500
|
)
|
|
$
|
0.08
|
|
|
Outstanding
at June 30, 2015
|
|
|
|
2,520,000
|
|
|
$
|
0.08
|
|
|
Granted
|
|
|
|
—
|
|
|
|
—
|
|
|
Forfeited
|
|
|
|
(10,000
|
)
|
|
$
|
0.08
|
|
|
Outstanding
at June 30, 2016
|
|
|
|
2,510,000
|
|
|
$
|
0.08
|
|
|
Exercisable
at June 30, 2016
|
|
|
|
2,510,000
|
|
|
$
|
0.08
|
|
The
Company has agreements with certain employees that provide for five years of annual grants of options, on each employment anniversary
date, to purchase shares of the Company’s common stock. The option price is determined based on the market price on the
date of grant, the options vest one year from the date of grant, and the options expire five years after vesting. The Company
granted 2,500,000 options under this arrangement 2013. There were no options granted in 2016 and 2015 under this agreement. The
Company recognized no stock-based compensation expense related to stock options during the years ended June 30, 2016 and 2015,
respectively. As of June 30, 2016, there was no remaining unrecognized compensation costs related to stock options. The intrinsic
value of both outstanding and exercisable stock options was approximately $100,000 at June 30, 2016.
The
fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model that uses the weighted-average
assumptions noted in the following table. The risk-free rate for periods within the contractual life of the options is based on
the U. S. Treasury yield in effect at the time of the grant. Volatility was based on the historical volatility of the Company’s
common stock. The Company estimated the expected life of options based on historical experience and other averaging methods.
Additional
information regarding options outstanding as of June 30, 2016 is as follows:
Options
Outstanding at June 30, 2016
|
|
Options
Exercisable at June 30, 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
|
|
|
|
3.64
|
|
|
$
|
0.08
|
|
|
|
2,510,000
|
|
|
$
|
0.08
|
|
|
|
|
|
|
2,510,000
|
|
|
|
|
|
|
|
|
|
|
|
2,510,000
|
|
|
|
|
|
NOTE
10 - INCOME TAXES
For
the years ended June 30, 2016 and 2015, our net losses were $1,298,088 and $907,474, respectively, and no provision for income
taxes was recorded. We made no provision for income taxes due to our utilization of federal net operating loss carry forwards
to offset both regular taxable income and alternative minimum taxable income.
Reconciliation
between the expected federal income tax rate and the actual tax rate is as follows:
|
|
Year
Ended June 30,
|
|
|
2016
|
|
2015
|
Federal
statutory tax rate
|
|
|
35
|
%
|
|
|
35
|
%
|
State
tax, net of federal benefit
|
|
|
6
|
%
|
|
|
6
|
%
|
Total
tax rate
|
|
|
40
|
%
|
|
|
40
|
%
|
Allowance
|
|
|
(40
|
%)
|
|
|
(40
|
%)
|
Effective
tax rate
|
|
|
-%
|
|
|
|
-%
|
|
The
following is a summary of the deferred tax assets:
|
|
Year
Ended June 30,
|
|
|
2016
|
|
2015
|
Net
operating loss carryforwards
|
|
|
4,350,000
|
|
|
$
|
4,224,000
|
|
Valuation
allowance
|
|
|
(4,350,000
|
)
|
|
|
(4,224,000
|
)
|
Net
deferred tax asset
|
|
$
|
—
|
|
|
$
|
—
|
|
The
Company has provided a valuation allowance on the deferred tax assets at June 30, 2016 and 2015 to reduce such asset to zero,
since there is no assurance that the Company will generate future taxable income to utilize such asset. Management will review
this valuation allowance requirement periodically and make adjustments as warranted. The net change in the valuation allowance
for the year ended June 30, 2015 was an increase of $126,000.
Veritec
has net operating loss carryforwards of approximately $10.9 million for federal purposes available to offset future taxable income
that expire in varying amounts through 2034. The ability to utilize the net operating loss carry forwards could be limited by
Section 382 of the Internal Revenue Code which limits their use if there is a change in control (generally a greater than 50%
change in ownership). The Company is subject to examination by tax authorities for all years for which a loss carry forward is
utilized in subsequent periods.
The
Company follows FASB guidelines that address the determination of whether tax benefits claimed or expected to be claimed on a
tax return should be recorded in the financial statements. Under this guidance, we may recognize the tax benefit from an uncertain
tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities,
based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should
be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.
This guidance also provides guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim
periods and requires increased disclosures. As of June 30, 2016 and 2015, the Company did not have a liability for unrecognized
tax benefits.
The
Company’s policy is to record interest and penalties on uncertain tax provisions as income tax expense. As of June 30, 2016
and 2015, the Company has no accrued interest or penalties related to uncertain tax positions.
NOTE
11 – COMMITMENTS AND CONTINGENCIES
Operating
Leases
The
Company leases approximately 4,200 square feet of office and laboratory space at 2445 Winnetka Avenue North, Golden Valley, Minnesota,
which serves as our primary place of business. This lease is with Van Thuy Tran, the
Chairman of the Board and the Chief Executive Officer of the Company. Our lease requires monthly payments of $4,200 which runs
through June 30, 2015, and was automatically extended for two one-year terms. Future annual minimum lease payments through fiscal
year 2017 total $50,400.
Strategic
Partnership Agreements
On
October 25, 2010, the Company entered into a Strategic Services Agreement with a customer. The term of the license is for 5 years
commencing on the effective date, which was the date of the first payment, or September 28, 2011. The customer has paid the total
fee of $250,000 in two installments. The Company initially classified this fee as deferred revenue to be recognized over the license
term of 5 years as the Company has a continuing obligation. As of June 30, 2015, the amount of deferred revenues was $65,347.
During the year ended June 30, 2016, the Company recognized revenue of $50,000 relating to this agreement. As of June 30, 2016,
the balance remaining to be recognized was $15,347.
On
November 14, 2012 (effective date), the Company entered into a Strategic Product License Agreement with a customer for a $100,000
license fee. The term of the license is for 5 years commencing on the effective date. The Company has classified the license fee
as deferred revenue to be recognized ratably over the license term of 5 years as the Company has a continuing obligation. As of
June 30, 2015, the amount of deferred revenue was $52,500. During the year ended June 30, 2016, the Company recognized revenue
of $20,000 relating to this agreement. As of June 30, 2016, the balance remaining to be recognized was $32,500.
On
July 1, 2014 (effective date), the Company entered into a Strategic Product License Agreement with one its customers for a $150,000
license fee. The term of the license is for 5 years commencing on the effective date. The Company has classified the license fee
as deferred revenue to be recognized ratably over the license term of 5 years as the Company has a continuing obligation. During
the year ended June 30, 2016, the Company recognized revenue of $30,000 relating to this agreement. As of June 30, 2016, the balance
remaining to be recognized was $90,000.
On
August 14, 2014 (effective date), the Company entered into a Pilot Program Agreement with one its customers for a $175,000 fee,
which was paid in advance of completion. The Company is responsible for certain deliveries as defined in the agreement. The Company
partially completed a portion of its deliverables under the agreement and recognized $86,361 as revenues. The Company had not
completed its remaining obligations as of June 30, 2015, and has classified the remaining balance as deferred revenue to be recognized
as revenue upon completion of its obligations. As of June 30, 2015, the balance remaining to be recognized was $88,639. During
fiscal year 2016, the Company completed its remaining obligations under the agreement and recorded revenue of $88,639 leaving
no remaining deferred revenue balance as of June 30, 2016.
On
April 4, 2015 (effective date), the Company entered into a Continuing Services Agreement with one its customers for a $142,500
fee, which was paid in advance of completion. The Company is responsible for certain deliveries as defined in the agreement. As
the Company had not completed its obligations as of June 30, 2015, the Company has classified the fees as deferred revenue to
be recognized upon completion of its obligations. During fiscal year 2016, the Company completed its remaining obligations under
the agreement and recorded revenue of $142,500 leaving no remaining deferred revenue balance as of June 30, 2016.
Incentive
Compensation Bonus Plan
On
December 5, 2008, the Company adopted an incentive compensation bonus plan to provide payments to key employees in the aggregated
amount of 10% of pre-tax earnings in excess of $3,000,000 after the end of each fiscal year to be distributed annually to employees.
As of June 30, 2016, the Company had not achieved an annual pre-tax earnings in excess of $3,000,000.
NOTE
12 – SUBSEQUENT EVENTS
Settlement
Agreement
On
September 21, 2016, the Company entered into a settlement agreement with an individual who is convertible note holder. The
individual loaned the Company $250,000 in prior years and was also issued 500,000 shares of common stock for services. The
Company alleged that the individual used the Company's intellectual property without approval. Under the terms of the settlement
agreement, the individual agreed to relinquish the convertible note payable, including unpaid interest, which had a current estimated
outstanding balance of $365,000, and return 500,000 shares of common stock issued to him. In turn, the Company agreed to
release and discharge the individual against all claims arising on or prior to the date of the settlement agreement.
The
Company currently anticipates that it will record this settlement as a gain in its upcoming Consolidated Statement of Operations
for the three months ended September 30, 2016.
Non-Binding
Letter of Intent
On
September 22, 2016, the Company announced that it has entered into a Non-Binding Letter of Intent (“LOI”) to acquire
all of Flathead Bancorporation, Inc.’s (“FB”) issued and outstanding shares. FB is the majority owner of First
Citizens Bank of Polson, Montana (“Citizens Bank”).
Under
the proposed terms of the LOI, Veritec would acquire 9.9 percent of FB’s issued and outstanding shares for $320,000 at the
closing date. Veritec plans to purchase the remaining 90.1 percent of FB’s outstanding common shares within three years
of the closing date for $2,880,000. The total purchase price for FB’s outstanding common shares (including the 9.9 percent
discussed above) would be $3,200,000 and is subject to, among other things, Veritec being able to obtain funding and obtain regulatory
approval from applicable banking authorities. The Company currently plans to raise funds from investors by issuing its common
shares, debt, or both. There is no assurance that the Company can be successful in raising such funds, or if the Company is successful
in raising such funds from sales of common shares, the terms of these sales may cause significant dilution to existing holders
of common stock.
Pursuant
to the LOI, Veritec would also provide loans to FB to be used for capital purposes of $280,000 at the closing date, $500,000 on
or before January 31, 2017 and $400,000 on or before April 1, 2017, for a total of $1,180,000. The loans would mature in five
years and require annual interest only payments at interest rates to be determined.