ITEM
1. FINANCIAL STATEMENTS
VERITEC,
INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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September 30,
2016
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June 30,
2016
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(Unaudited)
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ASSETS
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Current Assets:
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Cash
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$
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34,720
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$
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60,953
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Accounts receivable
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7,280
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9,309
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Prepaid expenses
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5,760
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1,897
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Total Current Assets
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47,760
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72,159
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Equipment, net
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70
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171
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Intangibles, net
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64,170
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80,208
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Total Assets
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$
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112,000
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$
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152,538
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LIABILITIES AND STOCKHOLDERS’ DEFICIENCY
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Current Liabilities:
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Notes payable
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$
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555,120
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$
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548,384
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Notes payable-related party
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1,390,020
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1,484,211
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Accounts payable
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671,240
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624,153
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Accounts payable-related party
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96,110
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96,110
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Customer deposits
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—
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25,000
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Deferred revenues
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113,050
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138,760
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Payroll tax liabilities
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151,700
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238,718
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Accrued expenses
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61,424
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75,374
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Total Current Liabilities
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3,038,664
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3,230,710
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Contingent earnout liability
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155,000
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155,000
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Total Liabilities
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3,193,664
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3,385,710
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Commitments and Contingencies
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Stockholders' Deficiency:
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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 September 30, 2016 and June 30, 2016
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1,000
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1,000
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Common stock, par value $.01; authorized 50,000,000 shares, 39,538,007 shares issued and outstanding as of September 30, 2016 and June 30, 2016
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395,380
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395,380
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Common stock to be issued, 145,000 shares, as of September 30, 2016 and June 30, 2016
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12,500
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12,500
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Additional paid-in capital
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17,948,326
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17,939,576
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Accumulated deficit
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(21,438,870
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)
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(21,581,628
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)
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Total Stockholders' Deficiency
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(3,081,664
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)
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(3,233,172
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)
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Total Liabilities and Stockholders’ Deficiency
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$
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112,000
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$
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152,538
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See
accompanying notes
VERITEC,
INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
(UNAUDITED)
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Three Months Ended
September 30,
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2016
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2015
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Revenue:
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Mobile banking technology revenue
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$
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47,080
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$
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67,263
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Barcode technology revenue
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—
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133,713
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Other revenue, related party
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22,900
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—
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Total revenue
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69,980
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200,976
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Cost of sales
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58,560
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86,636
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Gross profit
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11,420
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114,340
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Operating Expenses:
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General and administrative
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170,442
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214,544
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Sales and marketing
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5,170
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14,075
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Research and development
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10,740
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15,858
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Total operating expenses
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186,352
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247,204
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Loss from operations
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(174,932
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)
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(132,864
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Other Income (Expense):
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Gain on settlement
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364,690
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—
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Interest expense and financing costs, including $40,265 and $655,265, respectively, to related parties
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(47,000
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)
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(662,000
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Total other income (expense)
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317,690
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(662,000
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)
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Net Income (Loss)
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$
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142,758
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$
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(794,864
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)
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Net Income (Loss) Per Common Share - Basic and
diluted
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$
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0.00
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$
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(0.05
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)
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Weighted
Average Number of Shares Outstanding - Basic and diluted
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39,538,007
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16,776,676
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See
accompanying notes
VERITEC,
INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’
DEFICIENCY
FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2016
(UNAUDITED)
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Preferred
Stock
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Common
Stock
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Shares
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Amount
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Shares
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Amount
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Common
Stock to be Issued
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Additional
Paid-in Capital
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Accumulated
Deficit
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Stockholders’
Deficiency
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BALANCE, July 1, 2016
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1,000
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$
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1,000
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39,538,007
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$
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395,380
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$
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12,500
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$
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17,939,576
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$
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(21,581,628
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)
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$
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(3,233,172
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)
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Beneficial conversion feature on issuance of convertible notes payable
- related party
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—
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—
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—
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—
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—
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8,750
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—
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8,750
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Net Income
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—
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—
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—
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—
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—
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—
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142,758
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142,758
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BALANCE, September 30, 2016 (Unaudited)
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1,000
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$
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1,000
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39,538,007
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$
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395,380
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$
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12,500
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$
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17,948,326
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(21,438,870
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)
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$
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(3,081,664
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)
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See accompanying notes
VERITEC,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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Three Months Ended September 30,
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2016
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2015
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CASH FLOWS FROM OPERATING ACTIVITIES
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Net Income (Loss)
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$
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142,758
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$
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(794,864
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)
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Adjustments to reconcile net income (loss) to net cash used in operating activities:
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Depreciation
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101
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103
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Amortization
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16,038
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16,042
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Allowance for inventory obsolescence
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3,080
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—
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Shares to be issued for services
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—
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1,400
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Gain on settlement
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(364,690
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)
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—
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Beneficial conversion feature on issuance of convertible notes payable-related party
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8,750
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18,313
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Fair value of shares issued as inducement for conversion of notes payable - related party
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—
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452,770
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Modification cost of conversion feature of note payable
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—
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136,000
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Interest accrued on notes payable
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38,248
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53,997
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Changes in operating assets and liabilities:
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Accounts receivable
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2,029
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9,392
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Restricted cash
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—
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(1,455
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)
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Inventories
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(3,080
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)
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2,917
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Prepaid expenses
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(3,863
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)
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7,496
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Deferred revenues
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(25,710
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)
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(43,951
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)
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Payroll tax liabilities
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(87,018
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)
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(43,900
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)
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Accounts payable and accrued expenses
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8,137
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71,990
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Net cash used in operating activities
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(265,220
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)
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(113,750
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)
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CASH FLOWS FROM FINANCING ACTIVITIES
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Proceeds from convertible notes payable - related party
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124,000
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108,500
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Proceeds from notes payable - related party
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114,987
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—
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Payment on notes payable - related party
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—
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(2,500
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)
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Net cash provided by financing activities
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238,987
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106,000
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NET DECREASE IN CASH
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(26,233
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)
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(7,750
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)
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CASH AT BEGINNING OF YEAR
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60,953
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52,762
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CASH AT END OF YEAR
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$
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34,720
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$
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45,012
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SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest
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$
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—
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$
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—
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NON CASH INVESTING AND FINANCING ACTIVITIES
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Related party capital contribution on sale of assets offset to related party notes payable balance
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$
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—
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$
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670,000
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Conversion of notes payable into common stock
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$
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—
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$
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1,775,434
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|
Reclassification of customer deposit to accounts payable
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$
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25,000
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$
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—
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See
accompanying notes
VERITEC,
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
(UNAUDITED)
NOTE
1 – NATURE OF BUSINESS AND BASIS OF PRESENTATION
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 (“CBKC”). 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 below). 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. 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.
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”). If the Company is successful with its proposal to FB, the Company
plans to use its mobile banking technology products and services with 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. The Company anticipates completing an agreement
with FB and making its initial investment of $320,000 and initial loan payment of $280,000, or an aggregate of $600,000, by December
2016. The Company anticipates that The Matthews Group (see Note 7), owned 50% by Ms. Van Tran, the Company’s CEO, and 50%
by Larry Johanns, a significant stockholder of the Company, will loan the Company the necessary funds to accomplish its initial
planned transactions with FB.
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 7).
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 September 30, 2016, the JV has not received funding and anticipates receipt
of funding in fiscal year 2017.
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 month periods ended September 30, 2016 are not necessarily indicative of the
results that may be expected for the year ending June 30, 2017. The consolidated balance sheet information as of June 30, 2016
was derived from the Company’s audited consolidated financial statements as of and for the year ended June 30, 2016 included
in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on
September 26, 2016. These financial statements should be read in conjunction with that report.
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.
GOING
CONCERN
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 three months
ended September 30, 2016, the Company used cash in operating activities of $265,220, and at September 30, 2016, the Company had
a working capital deficit of $2,990,904 and a stockholders’ deficiency of $3,081,664. In addition, as of September 30, 2016,
the Company is delinquent in payment of $727,997 of its notes payable and is also delinquent in payment of $151,700 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 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 major 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
2 – 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
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, the software is imported into the hardware and
once 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.
Fair
Value of Financial Instruments
Fair
value measurements adopted by the Company are based on the authoritative guidance provided by the Financial Accounting Standards
Board (“FASB”) which 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 September 30, 2016 or June 30, 2016.
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, approximate 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.
Net
Income (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 three months ended September 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. At September 30, 2016, the Company’s Series H Preferred
Stock, Convertible Notes Payable and Options were antidilutive because their exercise prices and conversion prices were out of
the money.
As
of September 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.
|
|
As of September 30,
|
|
|
2016
|
|
2015
|
Series H Preferred Stock
|
|
|
10,000
|
|
|
|
10,000
|
|
Convertible Notes Payable
|
|
|
12,298,052
|
|
|
|
5,452,696
|
|
Options
|
|
|
2,500,000
|
|
|
|
2,510,000
|
|
Total
|
|
|
14,808,052
|
|
|
|
7,792,696
|
|
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 three months ended September 30, 2016.
Major
Customers
During
the three months ended September 30, 2016, the Company had four customers that represented an aggregate of 78% (33%, 19%, 15%
and 11%) of our revenue. During the three months ended September 30, 2015, the Company had one customer that represented 12% of
our revenue.
Foreign
Revenues
The
Company had no foreign revenues during the three months ended September 30, 2016. During the three months ended September 30,
2015, foreign revenues accounted for 65% (20% Taiwan, 18% China, 10% Korea, and 17% others) of the Company’s total revenues.
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 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,
Compensation - Stock Compensation (Topic 718)
: 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.
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
3 – 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. From the date of the acquisition and up to September 30, 2016, 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 are amortized over a three year period. As of September
30, 2016 and June 30, 2016, the unamortized balance of contract commitments was $64,170 and $80,208, respectively. For the three
months ended September 30, 2016 and 2015, the Company recorded $16,038 and $16,042 of amortization expense, respectively, related
to this intangible which is included in general and administrative expense in the accompanying Condensed Consolidated Statements
of Operations.
NOTE
4 – NOTES PAYABLE
Notes
payable
Notes
payable includes accrued interest and consists of the following at September 30, 2016 and June 30, 2016:
|
|
September 30, 2016
|
|
June 30,
2016
|
(a) Convertible notes
|
|
$
|
198,021
|
|
|
$
|
195,655
|
|
(b) Notes payable
|
|
|
357,099
|
|
|
|
352,729
|
|
Total notes - third parties
|
|
$
|
555,120
|
|
|
$
|
548,384
|
|
(a)
At June 30, 2016, convertible notes totaled $195,655. During the three months ended September 30, 2016, accrued interest increased
by $2,366, and at September 30, 2016, convertible notes totaled $198,021. The notes are unsecured, and interest is at various
rates ranging up to 10% per annum. At September 30, 2016, $161,507 of the notes are in default, and the balance of $36,514 is
due on demand. At September 30, 2016, the notes are convertible into 980,278 shares of the Company’s common stock at conversion
prices ranging from $0.08 per share to $0.30 per share.
(b)
At June 30, 2016, notes payable totaled $352,729. During the three months ended September 30, 2016, accrued interest increased
by $4,370, and at September 30, 2016, notes payable totaled $357,099. $322,816 of notes are secured by the Company’s intellectual
property, and $34,283 of notes are unsecured. Interest is at various rates ranging up to 10% per annum. The notes were due on
various dates through 2011 or on demand and at September 30, 2016, the Company was in default on notes totaling $321,586.
Notes
payable-related party
Notes
payable-related includes accrued interest and consists of the following at September 30, 2016 and June 30, 2016:
|
|
September 30,
2016
|
|
June 30,
2016
|
(c) Convertible notes-The Matthews Group
|
|
|
898,841
|
|
|
|
751,498
|
|
(d) Notes payable-The Matthews Group
|
|
|
338,925
|
|
|
|
216,648
|
|
(e)Convertible notes-other related
|
|
|
152,254
|
|
|
|
513,065
|
|
Notes payable-other related
|
|
|
—
|
|
|
|
3,000
|
|
Total notes-related party
|
|
|
1,390,020
|
|
|
|
1,484,211
|
|
(c)
The Matthews Group (see Note 7) is owned 50% by Ms. Van Tran, the Company’s CEO, and 50% by Larry Johanns, a significant
stockholder of the Company. At June 30, 2016, convertible notes due to The Matthews Group totaled $751,498. During the three months
ended September 30, 2016, $124,000 of convertible notes were issued to The Matthews Group, and accrued interest increased by $23,343.
At September 30, 2016, convertible notes-The Matthews Group totaled $898,841. The notes are unsecured, and interest is at various
rates ranging up to 10% per annum. At September 30, 2016, $40,000 of the notes are in default, and the balance of $858,841 are
due on demand. At September 30, 2016, the notes are convertible into 10,810,261 shares of the Company’s common stock at
conversion prices ranging from $0.08 per share to $0.30 per share. During the three months ended September 30, 2016, the market
price on the date some of the notes were issued was in excess of the conversion price, and as a result the Company recorded a
beneficial conversion feature on issuance of the notes of $8,750 which is included as interest expense
for
the three months ended September 30, 2016.
(d)
At June 30, 2016, notes payable due to The Matthews Group totaled $216,648. During the three months ended September 30, 2016,
$114,987 of notes payable were issued to The Matthews Group, and accrued interest increased by $7,290. At September 30, 2016,
notes payable-The Matthews Group totaled $338,925. The notes are unsecured, interest is at 10% per annum, and are due on demand.
The notes were made in relation to a management services agreement with The Matthews Group (see Note 7).
(e)
At June 30, 2016, convertible notes due other related parties totaled $513,065. During the three months ended September 30, 2016,
accrued interest increased by $875, and loans aggregating $361,686 were settled (see Note 8). At September 30, 2016 convertible
notes due other related parties totaled $152,254. The notes are unsecured, and interest is at various rates ranging up to 8% per
annum, were due in 2010 and are currently in default.
At
September 30, 2016, the notes are convertible into 507,513 shares of the Company’s common stock at conversion price of $0.30
per share.
NOTE
5 - STOCKHOLDERS’ DEFICIENCY
Common
Stock to be issued
In
July 2014 through June 2016, the Company granted 70,000 shares of the Company’s common stock to consultants for services
valued at $9,500. In addition, the Company granted 75,000 shares of the Company’s common stock to the Company’s directors
in 2012 valued at $3,000. As of September 30, 2016 and June 30, 2016, the 145,000 shares of common stock with an aggregate value
of $12,500 have not been issued and are reflected as common shares to be issued in the accompanying consolidated balance sheet.
NOTE
6 – STOCK OPTIONS
Stock
Options
A
summary of stock options for the three months ended September 30, 2016 is as follows:
|
|
Number of
|
|
Weighted - Average
|
|
|
Shares
|
|
Exercise Price
|
|
Outstanding at June 30, 2015
|
|
|
|
2,510,000
|
|
|
|
$0.08
|
|
|
Granted
|
|
|
|
—
|
|
|
|
$0.00
|
|
|
Forfeited
|
|
|
|
(10,000)
|
|
|
|
$0.08
|
|
|
Outstanding at September 30, 2016
|
|
|
|
2,500,000
|
|
|
|
$0.08
|
|
|
Exercisable at September 30, 2016
|
|
|
|
2,500,000
|
|
|
|
$0.08
|
|
At
September 30, 2016, the Company had 2,500,000 of options outstanding and exercisable. There were no options granted during the
three months ended September 30, 2016 and the Company recognized no stock-based compensation expense related to stock options
during the three months ended September 30, 2016 and 2015, respectively. As of September 30, 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 September 30, 2016 is as follows:
Options Outstanding at
September 30, 2016
|
|
Options Exercisable at
September 30, 2016
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Number of
|
|
|
|
Remaining
|
|
|
|
Average
|
|
|
|
Number of
|
|
|
|
Average
|
|
|
Range of
|
|
|
|
Shares
|
|
|
|
Contractual Life
|
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
|
Exercise
|
|
|
Exercise
|
|
|
|
Outstanding
|
|
|
|
(Years)
|
|
|
|
Price
|
|
|
|
Exercisable
|
|
|
|
Price
|
|
|
$0.13 - $1.45
|
|
|
|
2,500,000
|
|
|
|
3.50
|
|
|
|
$0.08
|
|
|
|
2,500,000
|
|
|
|
$0.08
|
|
|
|
|
|
|
2,500,000
|
|
|
|
|
|
|
|
|
|
|
|
2,500,000
|
|
|
|
|
|
The
weighted-average remaining contractual life of stock options outstanding and exercisable at September 30, 2016 is 3.50 years.
NOTE
7 – 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 for funding (see Notes 1, 4, and 8). During
the three months ended September 30, 2016, The Matthews Group loaned the Company $124,000 convertible notes and $114,987 notes
payable. As of September 30, 2016 and June 30, 2016, $1,237,766 and $968,146 is owed to The Matthews Group (see Note 4).
The
Company has a management services agreement with The Matthews Group to manage all facets of its previous barcode technology operations,
on behalf of The Matthews Group, from October 1, 2015 to May 30, 2017. In consideration, the Company earns a fee of 20% of all
revenues from the barcode technology operations through May 30, 2017. The Matthews Group bears the risk of loss from the barcode
operations and has the right to the residual benefits of the barcode operations. During the three months ended September 30, 2016,
the Company recorded revenue related to this agreement of $22,900. Pursuant to the management services agreement with The Matthews
Group, all cash flow (all revenues collected less direct costs paid) of the barcode technology operations is retained by the Company
as proceeds from unsecured notes payable to The Matthews Group. During the three months ended September 30, 2016, cash flow loans
of $114,987 were made to the Company at 10% interest per annum and due on demand (see Note 4).
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 September 30, 2016 and
June 30, 2016 were $96,110 and $96,110, respectively. These advances have been classified as accounts payable, related party on
the accompanying Condensed Consolidated Balance Sheets.
The
Company leases its office facilities from Ms. Tran. For the three months ended September 30, 2016 and 2015, rental payments to
Ms. Van Tran totaled $16,800 and $16,800, respectively.
NOTE
8 – SETTLEMENT
On
September 21, 2016, the Company entered into a settlement agreement with an individual who was a former officer of the Company.
The individual had 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 a convertible note payable and unpaid interest aggregating $361,686
(see Note 4), a note payable of $3,000, and return the 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 recorded this as a gain on settlement of $364,686 for the three months ended September 30, 2016. As of September 30, 2016,
the shares have not been relinquished. When the Company receives the shares, it will record a cancellation of shares.
NOTE
9 – SUBSEQUENT EVENTS
During
October 2016, The Matthews Group loaned the Company $200,000 and the Company paid-in-full its remaining balance owed of $151,700
for delinquent payroll taxes and accrued interest and penalties. The notes are unsecured, interest is at 10% per annum, and are
due on demand.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results
of Operations – Three Months Ended September 30, 2016 compared to September 30, 2015
We
had a net income of $142,758 in the three months ended September 30, 2016 compared to net loss of $794,864 in the three months
ended September 30, 2015.
Revenues
Details
of revenues are as follows:
|
|
Three Months Ended September 30,
|
|
Increase (Decrease)
|
|
|
2016
|
|
2015
|
|
$
|
|
%
|
Mobile Banking Technology
|
|
$
|
47,080
|
|
|
$
|
67,263
|
|
|
$
|
(20,183
|
)
|
|
|
(30.0
|
)
|
Barcode Technology (Sold September 30, 2015)
|
|
|
—
|
|
|
|
133,713
|
|
|
|
(133,713
|
)
|
|
|
(100.0
|
)
|
Other revenue, related party
|
|
|
22,900
|
|
|
|
—
|
|
|
|
22,900
|
|
|
|
100.0
|
|
Total Revenues
|
|
$
|
69,980
|
|
|
$
|
200,976
|
|
|
$
|
(130,996
|
)
|
|
|
(65.2
|
)
|
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 September 30, 2016 and 2015 were $47,080
and $67,263, 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
three months ended September 30, 2015 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 $22,900, from the barcode technology business
during the three months ended September 30, 2016. No similar activity occurred during the same period of the prior year.
Cost
of Sales
Cost
of sales for the three months ended September 30, 2016 and 2015, totaled $58,560 and $86,636, respectively. The decrease was primarily
from expense reductions relating to the sale of its barcode technology business as compared to the same period of the prior year.
Operating
Expenses
General
and administrative expenses for the three months ended September 30, 2016 were $170,442 compared to $214,544 for three months
ended September 30, 2015. The decrease was primarily from expense reductions relating to the sale of its barcode technology business
as compared to the same period of the prior year.
Sales
and marketing expense for the three months ended September 30, 2016 were $5,170 compared to $14,075 for three months ended September
30, 2015. The decrease was primarily 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 three months ended September 30, 2016 were $10,740 compared to $15,858 for three months ended
September 30, 2015. The decrease was primarily from expense reductions relating to the sale of its barcode technology business
as compared to the same period of the prior year.
Other
Income (Expenses)
During
the three months ended September 30, 2016, the Company recorded a gain on settlement of $364,690 (See Note 8 to Consolidated Financial
Statements). No similar activity occurred during the same period of the prior year.
Interest
expense and financing costs for the three months ended September 30, 2016 and 2015, was $47,000 and $662,000, respectively. The
decrease was the result of certain non-cash financing costs that occurred during the prior year for which no similar activity
occurred during the three months ended September 30, 2016.
Capital
Expenditures and Commitments
No
capital purchases were made during the three months ended September 30, 2016.
Liquidity
Our
cash balance at September 30, 2016 decreased to $34,720 as compared to $60,953 at June 30, 2016. The decrease was the result of
$265,220 in cash used in operating activities offset by $238,987 in cash provided by financing activities. Net cash used in operations
during the three months ended September 30, 2016 was $265,220 compared with $113,750 of net cash used in operations during the
same period of the prior year. Cash used in operations during the three months ended September 30, 2016 was primarily due to our
net income in the period of $142,758 offset by non-cash expenses of $298,473. Net cash provided by financing activities of $238,987
during the three months ended September 30, 2016 was primarily due to proceeds received from notes payable of $238,987. During
the same period of the prior year, net cash provided by financing activities of $106,000 was from proceeds received from notes
payable of $108,500 offset by payments of $2,500 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 three months
ended September 30, 2016, the Company used cash in operating activities of $265,220, and at September 30, 2016, the Company had
a working capital deficit of $2,990,904 and a stockholders’ deficiency of $3,081,664. In addition, as of September 30, 2016,
the Company is delinquent in payment of $727,997 of its notes payable and is also delinquent in payment of $151,700 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. As of September 30, 2016, the total amount of the remaining
one-year lease commitment is $33,600.
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 2 of the consolidated financial statements for a discussion of recently issued accounting standards.