PART
I
ITEM
1. FINANCIAL STATEMENTS
VERITEC,
INC. AND SUBSIDIARIES
CONSENSED CONSOLIDATED BALANCE SHEETS
|
|
March
31,
2017
(Unaudited)
|
|
June
30,
2016
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
53,400
|
|
|
$
|
60,953
|
|
Accounts
receivable
|
|
|
14,428
|
|
|
|
9,309
|
|
Prepaid
expenses
|
|
|
8,294
|
|
|
|
1,897
|
|
Total
Current Assets
|
|
|
76,122
|
|
|
|
72,159
|
|
|
|
|
|
|
|
|
|
|
Equipment,
net
|
|
|
—
|
|
|
|
171
|
|
Intangibles,
net
|
|
|
220,972
|
|
|
|
80,208
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
297,094
|
|
|
$
|
152,538
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ DEFICIENCY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
643,888
|
|
|
$
|
624,153
|
|
Accounts
payable, related party
|
|
|
96,110
|
|
|
|
96,110
|
|
Accrued
expenses
|
|
|
73,364
|
|
|
|
75,374
|
|
Payroll
tax liabilities
|
|
|
—
|
|
|
|
238,718
|
|
Notes
payable
|
|
|
568,588
|
|
|
|
548,384
|
|
Notes
payable, related party
|
|
|
2,117,048
|
|
|
|
1,484,211
|
|
Customer
deposits
|
|
|
—
|
|
|
|
25,000
|
|
Deferred
revenues
|
|
|
84,993
|
|
|
|
138,760
|
|
Derivative
liabilities
|
|
|
664,000
|
|
|
|
—
|
|
Total
Current Liabilities
|
|
|
4,247,991
|
|
|
|
3,230,710
|
|
|
|
|
|
|
|
|
|
|
Contingent
earnout liability
|
|
|
155,000
|
|
|
|
155,000
|
|
Total
Liabilities
|
|
|
4,402,991
|
|
|
|
3,385,710
|
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
Deficiency:
|
|
|
|
|
|
|
|
|
Convertible
preferred stock, par value $1.00; authorized 10,000,000 shares, 276,000 shares of Series H authorized, 1,000 shares issued
and outstanding as of March 31, 2017 and June 30, 2016
|
|
|
1,000
|
|
|
|
1,000
|
|
Common
stock, par value $.01; authorized 50,000,000 shares, 39,538,007 shares issued and outstanding as of March 31, 2017 and June
30, 2016
|
|
|
395,380
|
|
|
|
395,380
|
|
Common
stock to be issued, 2,145,000 shares and 145,000 shares to be issued as of March 31, 2017 and June 30, 2016, respectively
|
|
|
212,500
|
|
|
|
12,500
|
|
Additional
paid-in capital
|
|
|
17,974,576
|
|
|
|
17,939,576
|
|
Accumulated
deficit
|
|
|
(22,689,353
|
)
|
|
|
(21,581,628
|
)
|
Total
Stockholders' Deficiency
|
|
|
(4,105,897
|
)
|
|
|
(3,233,172
|
)
|
Total
Liabilities and Stockholders’ Deficiency
|
|
$
|
297,094
|
|
|
$
|
152,538
|
|
See
accompanying notes
VERITEC,
INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2017 AND 2016
(UNAUDITED)
|
|
Three
Months Ended
March
31,
|
|
|
2017
|
|
2016
|
|
|
(Unaudited)
|
|
(Unaudited)
|
Revenue:
|
|
|
|
|
|
|
|
|
Mobile
banking technology revenue
|
|
$
|
35,790
|
|
|
$
|
59,803
|
|
Management
fee revenue-related party
|
|
|
68,461
|
|
|
|
16,098
|
|
Total
revenue
|
|
|
104,251
|
|
|
|
75,901
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
54,222
|
|
|
|
52,722
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
50,029
|
|
|
|
23,179
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
193,922
|
|
|
|
170,451
|
|
Sales
and marketing
|
|
|
57,026
|
|
|
|
—
|
|
Research
and development
|
|
|
65,361
|
|
|
|
17,248
|
|
Total
operating expenses
|
|
|
316,309
|
|
|
|
187,699
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(266,280
|
)
|
|
|
(164,520
|
)
|
|
|
|
|
|
|
|
|
|
Other
Expense:
|
|
|
|
|
|
|
|
|
Change
in fair value of derivative liabilities
|
|
|
(482,000
|
)
|
|
|
—
|
|
Interest
expense, including $67,787 and $45,581, respectively, to related parties
|
|
|
(74,525
|
)
|
|
|
(51,658
|
)
|
Total
other expense
|
|
|
(556,525
|
)
|
|
|
(51,658
|
)
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(822,805
|
)
|
|
$
|
(216,178
|
)
|
|
|
|
|
|
|
|
|
|
Net
Loss Per Common Share - Basic and Diluted
|
|
$
|
(0.02
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
Weighted
Average Number of Shares Outstanding -
|
|
|
|
|
|
|
|
|
Basic
and Diluted
|
|
|
39,538,007
|
|
|
|
39,538,007
|
|
See
accompanying notes
VERITEC,
INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED MARCH 31, 2017 AND 2016
(UNAUDITED)
|
|
Nine
Months Ended
March
31,
|
|
|
2017
|
|
2016
|
|
|
(Unaudited)
|
|
(Unaudited)
|
Revenue:
|
|
|
|
|
Mobile
banking technology revenue
|
|
$
|
120,000
|
|
|
$
|
198,524
|
|
Management
fee revenue-related party
|
|
|
143,791
|
|
|
|
38,066
|
|
Barcode
technology revenue
|
|
|
—
|
|
|
|
133,714
|
|
Total
revenue
|
|
|
263,791
|
|
|
|
370,304
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
203,082
|
|
|
|
250,310
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
60,709
|
|
|
|
119,994
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
550,922
|
|
|
|
567,468
|
|
Sales
and marketing
|
|
|
62,586
|
|
|
|
16,641
|
|
Research
and development
|
|
|
87,491
|
|
|
|
59,064
|
|
Total
operating expenses
|
|
|
700,999
|
|
|
|
643,173
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(640,290
|
)
|
|
|
(523,179
|
)
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
Gain
on settlement-former officer
|
|
|
364,690
|
|
|
|
—
|
|
Expense
related to fair value of derivative liabilities
|
|
|
(182,000
|
)
|
|
|
|
|
Change
in fair value of derivative liabilities
|
|
|
(482,000
|
)
|
|
|
—
|
|
Interest
expense, including $147,918 and $750,699, respectively, to related parties
|
|
|
(168,125
|
)
|
|
|
(770,758
|
)
|
Total
other income (expense)
|
|
|
(467,435
|
)
|
|
|
(770,758
|
)
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(1,107,725
|
)
|
|
$
|
(1,293,937
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss Per Common Share - Basic and Diluted
|
|
$
|
(0.03
|
)
|
|
$
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
Weighted
Average Number of Shares Outstanding -
|
|
|
|
|
|
|
|
|
Basic
and Diluted
|
|
|
39,538,007
|
|
|
|
31,575,147
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes
VERITEC,
INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY
FOR
THE NINE MONTHS ENDED MARCH 31, 2017
(UNAUDITED)
|
|
Preferred
Stock
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Common
Stock to be Issued
|
|
Additional
Paid-in Capital
|
|
Accumulated
Deficit
|
|
Stockholders’
Deficiency
|
BALANCE,
July 1, 2016
|
|
|
1,000
|
|
|
$
|
1,000
|
|
|
|
39,538,007
|
|
|
$
|
395,380
|
|
|
$
|
12,500
|
|
|
$
|
17,939,576
|
|
|
$
|
(21,581,628
|
)
|
|
$
|
(3,233,172
|
)
|
Shares
to be issued for asset acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
200,000
|
|
Beneficial
conversion feature on issuance of convertible notes payable-related party
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
35,000
|
|
|
|
—
|
|
|
|
35,000
|
|
Net
Loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,107,725
|
)
|
|
|
(1,107,725
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
March 31, 2017 (Unaudited)
|
|
|
1,000
|
|
|
$
|
1,000
|
|
|
|
39,538,007
|
|
|
$
|
395,380
|
|
|
$
|
212,500
|
|
|
$
|
17,974,576
|
|
|
$
|
(22,689,353
|
)
|
|
$
|
(4,105,897
|
)
|
See
accompanying notes
VERITEC,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
Nine
Months Ended
March
31,
|
|
|
2017
|
|
2016
|
|
|
(Unaudited)
|
|
(Unaudited)
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(1,107,725
|
)
|
|
$
|
(1,293,937
|
)
|
Adjustments
to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
171
|
|
|
|
309
|
|
Amortization
|
|
|
59,236
|
|
|
|
48,125
|
|
Allowance
for inventory obsolescence
|
|
|
—
|
|
|
|
14,461
|
|
Shares
to be issued for services
|
|
|
—
|
|
|
|
2,100
|
|
Gain
on settlement-former officer
|
|
|
(364,690
|
)
|
|
|
—
|
|
Expense
related to fair value of derivative liabilities
|
|
|
182,000
|
|
|
|
—
|
|
Change
in fair value of derivative liabilities
|
|
|
482,000
|
|
|
|
|
|
Beneficial
conversion feature on issuance of convertible notes payable-related party
|
|
|
35,000
|
|
|
|
77,188
|
|
Fair
value of shares issued as inducement for conversion of notes payable-related party
|
|
|
—
|
|
|
|
452,770
|
|
Modification
cost of conversion feature of note payable
|
|
|
—
|
|
|
|
136,000
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(5,119
|
)
|
|
|
23,363
|
|
Restricted
cash
|
|
|
—
|
|
|
|
26,631
|
|
Prepaid
expenses
|
|
|
(6,397
|
)
|
|
|
17,746
|
|
Accounts
payable
|
|
|
(5,265
|
)
|
|
|
(11,549
|
)
|
Accrued
expenses
|
|
|
(2,010
|
)
|
|
|
43,884
|
|
Payroll
tax liabilities
|
|
|
(238,718
|
)
|
|
|
(130,800
|
)
|
Deferred
revenues
|
|
|
(53,767
|
)
|
|
|
(96,453
|
)
|
Accrued
interest
|
|
|
130,625
|
|
|
|
104,532
|
|
Net
cash used in operating activities
|
|
|
(894,659
|
)
|
|
|
(565,630
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds
from convertible notes payable-related party
|
|
|
477,500
|
|
|
|
441,389
|
|
Proceeds
from notes payable-related party
|
|
|
409,606
|
|
|
|
124,357
|
|
Payment
on notes payable-related party
|
|
|
—
|
|
|
|
(2,500
|
)
|
Net
cash provided by financing activities
|
|
|
887,106
|
|
|
|
563,246
|
|
|
|
|
|
|
|
|
|
|
NET
DECREASE IN CASH
|
|
|
(7,553
|
)
|
|
|
(22,384
|
)
|
CASH
AT BEGINNING OF PERIOD
|
|
|
60,953
|
|
|
|
52,762
|
|
CASH
AT END OF PERIOD
|
|
$
|
53,400
|
|
|
$
|
30,378
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
Cash
paid for interest
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
NON
CASH INVESTING AND FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Related
party capital contribution on sale of assets offset to related party notes payable balance
|
|
$
|
—
|
|
|
$
|
670,000
|
|
Conversion
of notes payable into common stock
|
|
$
|
—
|
|
|
$
|
1,775,434
|
|
Reclassification
of customer deposit to accounts payable
|
|
$
|
25,000
|
|
|
$
|
—
|
|
Shares
to be issued for asset acquisition
|
|
$
|
200,000
|
|
|
$
|
—
|
|
See
accompanying notes
VERITEC,
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED MARCH 31, 2017 AND 2016
(UNAUDITED)
NOTE
1 – NATURE OF BUSINESS 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 Veritec
Financial Systems, Inc., Tangible Payment Systems, Inc., and Public Bell, Inc. (collectively the “Company”).
Nature
of Business
The
Company is primarily engaged in the development, sales, and licensing of products and providing services related to its mobile
communication and 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
On
January 12, 2009, Veritec formed Veritec Financial Systems, Inc., 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.
Mobile
Communications Solutions
On
February 8, 2017, the Company acquired certain intellectual property (see Note 2). Through the acquisition of the intellectual
property and upon completion of software projected by August, 2017, the Company plans to offer customers cloud based mobile communications
services for homes and businesses.
BASIS
OF PRESENTATION
The
accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with United States of America
generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form
10-Q. Accordingly, the Condensed Consolidated Financial Statements do not include all of the information and footnotes required
for complete financial statements.
In
the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three and nine month periods ended March 31, 2017 are not necessarily indicative
of the results that may be expected for the year ending June 30, 2017. The Condensed Consolidated Balance Sheet information as
of June 30, 2016 was derived from the Company’s audited Condensed 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
accompanying Condensed Consolidated Financial Statements include the accounts of Veritec and its wholly owned subsidiaries, Veritec
Financial Systems, Inc., Tangible Payment Systems, Inc., and Public Bell, Inc. Inter-company transactions and balances were eliminated
in consolidation.
GOING
CONCERN
The
accompanying Condensed Consolidated Financial Statements have been prepared assuming the Company will continue as a going concern,
which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. During the nine
months ended March 31, 2017, the Company incurred a net loss of $1,107,725 and used cash in operating activities of $894,659,
and at March 31, 2017, the Company had a working capital deficit of $4,171,869 and a stockholders’ deficiency of $4,105,897.
In addition, as of March 31, 2017, the Company is delinquent in payment of $532,344 of its notes payable and $185,874 of its notes
payable-related parties. These factors, among others, raise substantial doubt about our ability to continue as a going concern
within one year after the date that the financial statements are issued. In addition, the Company’s independent registered
public accounting firm, in its report on our June 30, 2016 financial statements, 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 Condensed Consolidated Financial Statements do not include any adjustments that may result from this uncertainty.
Use
of Estimates
The
preparation of Condensed 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 Condensed 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 used in valuing derivatives and stock-based compensation, and the valuation
of deferred taxes.
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
carrying amounts reported in the Condensed 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.
At
March 31, 2017, the Company’s Condensed Consolidated Balance Sheet included the fair value of derivative liabilities of
$664,000, which was based on Level 2 measurements. At June 30, 2016, the Company did not have derivative liabilities.
Derivative
Financial Instruments
The
Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify
as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument
is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported
in the Condensed Consolidated Statements of Operations. The classification of derivative instruments, including whether such instruments
should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities
are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument
could be required within 12 months of the balance sheet date.
In
the case of insufficient authorized share capital available to fully settle outstanding contracts, the Company utilizes the earliest
inception date sequencing method to prioritize its convertible securities. At each reporting date, the Company reviews its convertible
securities to determine their classification is appropriate.
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 and nine months ended March 31, 2017 and 2016, the calculations of basic and diluted loss per share are the same because
potential dilutive securities would have an anti-dilutive effect. At March 31, 2017, 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 March 31, 2017 and 2016, 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 March 31,
|
|
|
2017
|
|
2016
|
Series
H Preferred Stock
|
|
|
10,000
|
|
|
|
10,000
|
|
Convertible
Notes Payable
|
|
|
17,533,531
|
|
|
|
7,884,519
|
|
Options
|
|
|
2,500,000
|
|
|
|
2,510,000
|
|
Total
|
|
|
20,043,531
|
|
|
|
10,404,519
|
|
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 nine months ended March 31, 2017.
During
the three months ended March 31, 2017, the Company had two customers that represented an aggregate of 78% (66% and 12%) of our
revenue. During the three months ended March 31, 2016, the Company had three customers that represented an aggregate of 59% (24%,
19% and 16%) of our revenue.
During
the nine months ended March 31, 2017, the Company had two customers that represented an aggregate of 65% (53% and 12%) of our
revenue. During the nine months ended March 31, 2016, the Company had no customers that accounted for more than 10% of our revenue.
Foreign
Revenues
During
the three months ended March 31, 2017 and 2016, the Company had no foreign revenues.
During
the nine months ended March 31, 2017, the Company had no foreign revenues. During the nine months ended March 31, 2016, foreign
revenues accounted for 36% (11% Taiwan, 10% China, and 15% 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. Under ASU
2014-09, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that
reflects the consideration which the entity expects to receive in exchange for those goods or services. In addition, the standard
requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
The FASB has recently issued ASU 2016-08, ASU 2016-10, ASU 2016-11, ASU 2016-12, ASU 2016-20, and ASU 2017-05, all of which clarify
certain implementation guidance within ASU 2014-09. 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. The standard can be adopted either retrospectively to each prior reporting period presented (full retrospective method),
or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application
(the cumulative catch-up transition method). The Company is currently in the process of analyzing the information necessary to
determine the impact of adopting this new guidance on its financial position, results of operations, and cash flows. The Company
will adopt the provisions of this statement in the first quarter of fiscal 2018.
In
February 2016, the FASB issued ASU No. 2016-02, Leases. This update will require the recognition of a right-of-use asset and a
corresponding lease liability, initially measured at the present value of the lease payments, for all leases with terms longer
than 12 months. For operating leases, the asset and liability will be expensed over the lease term on a straight-line basis, with
all cash flows included in the operating section of the statement of cash flows. For finance leases, interest on the lease liability
will be recognized separately from the amortization of the right-of-use asset in the statement of comprehensive income and the
repayment of the principal portion of the lease liability will be classified as a financing activity while the interest component
will be included in the operating section of the statement of cash flows. ASU 2016-02 is effective for annual and interim reporting
periods beginning after December 15, 2018. Early adoption is permitted. Upon adoption, leases will be recognized and measured
at the beginning of the earliest period presented using a modified retrospective approach. The Company is currently evaluating
the impact of the adoption of ASU 2016-02 on its financial statements and related disclosures.
In
January 2017, the FASB issued ASU 2017-01, an update to ASC Topic 805, Business Combinations. ASU 2017-01 narrows the definition
of a business and provides a framework for making reasonable judgments about whether a transaction involves an asset or a business.
ASU 2017-01 clarifies that when substantially all the fair value of the gross assets acquired (or disposed of) is concentrated
in a single identifiable asset or a group of similar identifiable assets, the set is not a business. ASU 2017-01 also requires
that a set cannot be considered a business unless it includes, at a minimum, an input and a substantive process that together
significantly contribute to the ability to create output. ASU 2017-01 is effective for public business entities for fiscal years
beginning after December 15, 2017, and interim periods within those years, with early adoption permitted, including adoption in
an interim period. The Company early adopted the provisions of ASU 2017-01 on January 1, 2017, and concluded that the acquisition
of certain intellectual property in February 2017 (see Note 2) did not meet the definition of a business and was treated as an
asset acquisition.
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 financial statements.
NOTE
2 – INTANGIBLE ASSETS
Intangible
assets consists of the following at March 31, 2017 and June 30, 2016:
|
|
|
|
March
31,
2017
|
|
June
30,
2016
|
|
(a)
|
|
|
Contract
commitments
|
|
$
|
192,500
|
|
|
$
|
192,500
|
|
|
(b)
|
|
|
Intellectual
property
|
|
|
200,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
392,500
|
|
|
|
192,500
|
|
|
|
|
|
Less
accumulated amortization
|
|
|
(171,528
|
)
|
|
|
(112,292
|
)
|
|
|
|
|
Intangible
assets, net
|
|
$
|
220,972
|
|
|
$
|
80,208
|
|
For
the three and nine months ended March 31, 2017 and 2016, the Company recorded $27,153 and $59,236, and $16,042 and $48,042, of
amortization expense respectively, related to intangible assets which is included in general and administrative expense in the
accompanying Condensed Consolidated Statements of Operations.
Estimated
future amortization expense for intangible assets is as follows: Remainder of June 30, 2017 $32,666; June 30, 2018 $82,750; June
30, 2019 $66,660; and June 30, 2020 $38,896.
(a)
On September 30, 2014, the Company acquired certain assets and liabilities of Tangible Payments LLC for $192,500, including a
contingent earnout payment of $155,000. The Company assigned $192,500 of the purchase price to contract commitments which are
amortized over a three year period. As of March 31, 2017 and June 30, 2016, the unamortized balance of contract commitments was
$32,083 and $80,208, respectively. The earnout payment of $155,000 is payable on a monthly basis from the net profits derived
from the acquired assets, as defined. From the date of the acquisition and up to March 31, 2017, there was no net profit derived
from the acquired assets and accordingly, no payments were made on the earnout. The earnout payment is due in full at such time
as the Company receives equity investments aggregating $1.3 million.
(b)
On February 8, 2017, the Company, through its wholly-owned subsidiary, Public Bell, a Delaware corporation, acquired certain
intellectual property from Public Bell, Inc., a California corporation and C. Nguyen, its sole shareholder. The intellectual property
is related to the development of mobile and Wi-Fi/WiMax software applications. In consideration, the Company agreed to issue 2,000,000
restricted shares of the Company’s common stock valued at $200,000 to Nguyen, based on the closing price of the Company’s
stock on the date of the transaction. As the assets acquired do not constitute a business, the Company accounted for this as an
asset acquisition. Accordingly the Company valued the acquired intellectual property at $200,000 which will be amortized over
a two year period. As of March 31, 2017, the unamortized balance of the intellectual property was $188,889. In addition, the Company
entered into a five-year employment agreement with Nguyen. The Company agreed to pay Nguyen a base salary of $30,000 per annum
and a performance bonus equal to 25% of the Company’s wholly-owned subsidiary, Public Bell’s annual net income, as
defined, up to $3,000,000. Given the preliminary stage of development of the operations of this subsidiary and the level of uncertainty
that exists related to future probability, management has assessed the likelihood of payment under this bonus as being remote.
Accordingly, no contingent earnout liability was recorded when the purchase of the intellectual property assets was recorded.
NOTE
3 – NOTES PAYABLE
Notes
payable-in default
Notes
payable includes principal and accrued interest and consists of the following at March 31, 2017 and June 30, 2016:
|
|
|
|
March
31,
2017
|
|
June
30,
2016
|
|
(a)
|
|
|
Convertible
notes-in default
|
|
$
|
202,750
|
|
|
$
|
195,655
|
|
|
(b)
|
|
|
Notes
payable-in default
|
|
|
365,838
|
|
|
|
352,729
|
|
|
|
|
|
Total
notes-third parties
|
|
$
|
568,588
|
|
|
$
|
548,384
|
|
(a)
At June 30, 2016, convertible notes totaled $195,655. During the nine months ended March 31, 2017, accrued interest of $7,095
was added to principal. At March 31, 2017, convertible notes totaled $202,750. The notes are unsecured, and interest accrues at
rates ranging from 5% to 8% per annum. At March 31, 2017, $166,506 of notes were due through 2011 and are in default. These notes
are convertible at a conversion price of $0.30 per share into 555,021 shares of the Company’s common stock. The balance
of $36,244 is due on demand, and is convertible at a conversion price of $0.08 per share into 453,051 shares of the Company’s
common stock.
(b)
At June 30, 2016, notes payable totaled $352,729. During the nine months ended March 31, 2017, accrued interest of $13,109 was
added to principal. At March 31, 2017, the notes payable totaled $365,838. $330,555 of notes are secured by the Company’s
intellectual property, and $35,283 of notes are unsecured. Interest accrues at rates ranging from 6.5% to 10% per annum. The total
of $365,838 was due in 2012, and is in default.
Notes
payable-related party
Notes
payable-related includes principal and accrued interest and consists of the following at March 31, 2017 and June 30, 2016:
|
|
|
|
March
31,
2017
|
|
June
30,
2016
|
|
(c)
|
|
|
Convertible
notes-The Matthews Group
|
|
|
$ 1
,210,116
|
|
|
$
|
669,648
|
|
|
(d)
|
|
|
Notes
payable-The Matthews Group
|
|
|
658,704
|
|
|
|
216,648
|
|
|
(e)
|
|
|
Convertible
notes-other related-in default
|
|
|
248,228
|
|
|
|
237,725
|
|
|
(f)
|
|
|
Convertible
notes-former officer
|
|
|
—
|
|
|
|
360,190
|
|
|
|
|
|
Total
notes-related party
|
|
$
|
2,117,048
|
|
|
$
|
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
shareholder of the Company. At June 30, 2016, convertible notes due to The Matthews Group totaled $669,648. During the nine months
ended March 31, 2017, $477,500 of convertible notes were issued to The Matthews Group, and accrued interest of $62,968 was added
to principal. At March 31, 2017, convertible notes due to The Matthews Group totaled $1,210,116. The notes are unsecured, interest
accrues at rates ranging from 8% to 10% per annum, and are due on demand. At March 31, 2017, the notes are convertible at a conversion
price of $0.08 per share into 15,126,454 shares of the Company’s common stock. During the three and nine months ended March
31, 2017, 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 $18,750 and $35,000, respectively, which is included
in interest expense and financing costs in the Condensed Consolidated Statements of Operations. During the three and nine months
ended March 31, 2016, the Company recorded a beneficial conversion feature on issuance of the notes of $22,000 and $77,188, respectively
(d)
At June 30, 2016, notes payable due to The Matthews Group totaled $216,648. During the nine months ended March 31, 2017, $409,606
of notes payable were issued to The Matthews Group, and accrued interest of $32,450 was added to principal. At March 31, 2017,
notes payable due to The Matthews Group totaled $658,704. The notes are unsecured, accrued interest 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 $237,725. During the nine months ended March 31, 2017, accrued
interest of $10,503 was added to principal. At March 31, 2017 convertible notes due other related parties totaled $248,228. The
notes are unsecured and accrue interest at rates ranging from 8% to 10% per annum. At March 31, 2017, $185,874 of the notes were
due in 2010 and are in default, and the balance of $62,354 is due on demand. At March 31, 2017, $185,874 of the notes are convertible
at a conversion price of $0.30 per share into 619,581 shares of the Company’s common stock, $23,505 of the notes are convertible
at a conversion price of $0.10 per share into 235,050 shares of the Company’s common stock, and $38,849 of the notes are
convertible at a conversion price of $0.08 per share into 485,613 shares of the Company’s common stock.
(f)
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 $364,686,
and return 500,000 shares of common stock previously 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 a gain
on the settlement of $364,686 in the accompanying Condensed Consolidated Statements of Operations for the nine months ended March
31, 2017. As of March 31, 2017, the 500,000 shares have not been relinquished. When the Company receives the shares, it will record
a cancellation of shares.
NOTE
4 - DERIVATIVE LIABILITIES
From
time to time, the Company issues convertible notes payable with embedded conversion features and options to purchase common stock.
Pursuant to the FASB authoritative guidance on determining whether an instrument (or embedded feature) is indexed to an entity’s
own stock, when there are insufficient authorized shares, the obligation for the exercise of the convertible instrument should
be classified as a liability and measured at fair value. During the nine months ended March 31, 2017, the Company determined that
there were not sufficient authorized shares of common stock available for issuance upon conversion of certain of its convertible
notes. During the nine months ended March 31, 2017, the Company recorded an expense related to fair value of derivative liabilities
of $182,000. During the three and nine months ended March 31, 2017, the Company recorded a change in the fair value of the derivative
liabilities of $482,000. The conversion feature of the notes is re-measured at the end of every reporting period with the change
in value reported in the Condensed Consolidated Statements of Operations.
The
derivative liability was valued at the following dates using a Black-Scholes-Merton model with the following assumptions:
|
|
March
31,
2017
|
|
December
31,
2017
|
Conversion
feature:
|
|
|
|
|
|
|
|
|
Risk-free
interest rate
|
|
|
1.5
|
%
|
|
|
0.07
|
%
|
Expected
volatility
|
|
|
124
|
%
|
|
|
99
|
%
|
Expected
life (in years)
|
|
|
1
- 2.7 years
|
|
|
|
1.2
years
|
|
Expected
dividend yield
|
|
|
—
|
|
|
|
—
|
|
Fair
Value:
|
|
|
|
|
|
|
|
|
Conversion
feature
|
|
$
|
664,000
|
|
|
$
|
182,000
|
|
The
risk-free interest rate was based on rates established by the Federal Reserve Bank. The Company used its own historical stock’s
volatility as the estimated volatility. The expected life of the conversion feature of the notes or options was based on the estimated
remaining terms of the notes or options, or expected settlement date for notes due on demand or that have matured. The expected
dividend yield was based on the fact that the Company has not customarily paid dividends to its holders of common stock in the
past and does not expect to pay dividends to holders of its common stock in the future.
NOTE
5 - STOCKHOLDERS’ DEFICIENCY
As
of March 31, 2017 and June 30, 2016, 2,145,000 and 145,000 shares of common stock issuable with an aggregate value of $212,500
and $12,500, respectively, have not been issued and are reflected as common shares to be issued in the accompanying Condensed
Consolidated Balance Sheets, respectively.
NOTE
6 – STOCK OPTIONS
Stock
Options
A
summary of stock options for the nine months ended March 31, 2017 is as follows:
|
|
Number
of
|
|
Weighted
- Average
|
|
|
Shares
|
|
Exercise
Price
|
Outstanding
at June 30, 2016
|
|
|
|
2,510,000
|
|
|
$
|
0.08
|
|
Granted
|
|
|
|
—
|
|
|
$
|
0.00
|
|
Forfeited
|
|
|
|
(10,000
|
)
|
|
$
|
0.08
|
|
Outstanding
at March 31, 2017
|
|
|
|
2,500,000
|
|
|
$
|
0.08
|
|
Exercisable
at March 31, 2017
|
|
|
|
2,500,000
|
|
|
$
|
0.08
|
|
At
March 31, 2017, the Company had 2,500,000 of options outstanding and exercisable. The options expire in February, 2020, and are
exercisable at $0.08 per share. There were no options granted during the nine months ended March 31, 2017 and the Company recognized
no stock-based compensation expense related to stock options during the three and nine months ended March 31, 2017 and 2016, respectively.
As of March 31, 2017, there was no remaining unrecognized compensation costs related to stock options, and the intrinsic value
of these options was $62,500.
Additional
information regarding options outstanding as of March 31, 2017 is as follows:
Options
Outstanding at
March 31, 2017
|
|
Options
Exercisable at
March 31, 2017
|
|
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
|
$
|
0.08
|
|
|
|
2,500,000
|
|
|
|
2.75
|
|
|
$
|
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 March 31, 2017 is 2.75 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 and 3).
Barcode
Technology management services agreement and loans
On
September 30, 2015, the Company sold all of its assets of its Barcode Technology comprised solely of its intellectual property
to The Matthews Group. The Company’s Barcode Technology was originally invented by the founders of Veritec as a product
identification system for identification and tracking of parts, components and products mostly in the liquid crystal display (LCD)
markets and for secure identification documents, financial cards, medical records and other high security applications. The Company
has a management services agreement with The Matthews Group to manage all facets of the barcode technology operations, on behalf
of The Matthews Group, 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. In consideration, the Company earns a fee of 20% of all revenues from
the barcode technology operations. During the three and nine months ended March 31, 2017 and 2016, the Company recorded management
fee revenue related to this agreement of $68,461 and $143,791, and $16,098 and $38,066, respectively. Pursuant to the management
services agreement, 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 due The Matthews Group. During the nine months ended March 31, 2017 and
2016, cash flow loans of $409,606 and $124,357, respectively, were made to the Company at 10% interest per annum and due on demand.
At March 31, 2017, cash flow loans of $658,704 are due to The Matthews Group (see Note 3).
During
the nine months ended March 31, 2017, The Matthews Group loaned the Company $477,500 of convertible notes. At March 31, 2017,
convertible notes of $1,210,116 are due The Matthews Group (see Note 3).
On
March 1, 2017, the Company’s wholly owned subsidiary, Public Bell, Inc., entered into an Exclusive Product Provider Agreement
(“Agreement”) with an affiliate of American Heritage College (AHC). Ms. Van Tran, the Company’s CEO/Executive
Chair, is a part owner of the affiliate of AHC. Public Bell paid AHC $50,000 in exchange for AHC agreeing to purchase Wi-Fi/WiMax
broadband equipment exclusively from Public Bell and for the exclusive right to provide future products and services to AHC. During
both the three and nine months ended March 31, 2017, the $50,000 paid to AHC was recorded to sales and marketing expense
in
the accompanying Condensed Consolidated Statements of Operations.
As
of March 31, 2017 and June 30, 2016, $96,110 and $96,110, respectively, of advances due to Ms. Van Tran have been presented as
accounts payable, related party on the accompanying Condensed Consolidated Balance Sheets. The advances are unsecured, non-interest
bearing, and due on demand.
The
Company leases its office facilities from Ms. Tran. For both the three and nine months ended March 31, 2017 and 2016, rental payments
to Ms. Van Tran totaled $12,750 and $38,250, respectively.
NOTE
8 – COMMITMENTS AND CONTINGENCIES
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
transaction is subject to, among other things, Veritec being able to obtain funding and obtain regulatory approval from applicable
banking authorities. The Company is currently evaluating its options related to this transaction including its termination.
On
January 17, 2016, Veritec Inc. (the “Company”) entered into an agreement with Vietnam Alliance Capital (“VAC”),
which is domiciled in Vietnam, to form a joint venture (“JV’) to operate a debit card business in Vietnam. The JV
will be named Veritec Asia. The Company will be a 30% member in the JV and VAC will be a 70% member in the JV. Pursuant to the
agreement, the Company will grant a license of certain products to the JV, and provide certain technologies and technological
support to the JV. VAC will manage, control, and conduct its day-to-day business and development activities. In addition VAC has
agreed to raise all funds to capitalize the JV. As of March 31, 2017, the JV has not received funding and the Company is currently
evaluating its options related to the JV including its termination.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results
of Operations – Three Months Ended March 31, 2017 compared to March 31, 2016
We
had a net loss of $822,805 in the three months ended March 31, 2017 compared to net loss of $216,178 in the three months ended
March 31, 2016.
Revenues
Details
of revenues are as follows:
|
|
Three
Months Ended March 31,
|
|
Increase
(Decrease)
|
|
|
2017
|
|
2016
|
|
$
|
|
%
|
Mobile
Banking Technology
|
|
$
|
35,790
|
|
|
$
|
59,803
|
|
|
$
|
(24,013
|
)
|
|
|
(40.2
|
)
|
Other
revenue, related party
|
|
|
68,461
|
|
|
|
16,098
|
|
|
|
52,363
|
|
|
|
325.3
|
|
Total
Revenues
|
|
$
|
104,251
|
|
|
$
|
75,901
|
|
|
$
|
28,350
|
|
|
|
37.4
|
|
Mobile
Banking Technology
Mobile
Banking Technology revenues include products such as the Company’s Blinx On-Off™ prepaid toggle Card and its Open
Loop/Close Loop System and Bio ID Card Platform. Mobile Banking Technology uses web-based mobile technology to offer financial
cardholders the very best technology in conducting secure financial transactions in real time, protecting personal identity, and
financial account security. Mobile Banking Technology revenues for the three months ended March 31, 2017 and 2016 were $35,790
and $59,803, respectively. The decrease in Mobile Banking Technology revenues was due to both the conclusion of certain long term
contracts during the prior year and the Company not having a bank to sponsor its mobile banking solutions during the three months
ended March 31, 2017 (see Note 1 to Condensed Consolidated Financial Statements).
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 $68,461 and $16,098, from the barcode technology
business during the three month ended March 31, 2017, and 2016, respectively.
Cost
of Sales
Cost
of sales for the three months ended March 31, 2017 and 2016 were comparable at $54,222 and $52,722, respectively.
Operating Expenses
General
and administrative expenses for the three months ended March 31, 2017 and 2016 were $193,922 compared to $170,451, respectively.
The increase in general and administrative expenses was realized from the creation and operation of a new division, Public Bell,
Inc. (see Note 1 of the Condensed Consolidated Financial Statements). No similar activity occurred during the same period of the
prior year.
Sales
and marketing expenses for the three months ended March 31, 2017 and 2016 were $57,026 compared to $0, respectively. The increase
in sales and marketing expenses was primarily from the recording of a $50,000 expense relating to the signing of an Exclusive
Products Provider Agreement during the period (see Note 7 of the Condensed Consolidated Financial Statements). No similar activity
occurred during the same period of the prior year.
Research
and development expenses for the three months ended March 31, 2017 and 2016 were $65,361 compared to $17,248 for three months
ended March 31, 2016. The increase in research and development expenses was primarily related to software development expenses
relating to the development of assets acquired during the period (see Note 2 of the Condensed Consolidated Financial Statements).
No similar activity occurred during the same period of the prior year.
Other
Expenses
For
the three months ended March 31, 2017, the Company recognized an expense related to the fair value of derivatives liabilities
of $482,000. No similar activity occurred during the same period of the prior year.
Interest
expense and financing costs for the three months ended March 31, 2017 and 2016 were $74,525 and $51,658, respectively. The increase
was primarily a result of increased debt levels offset by a reduction in non-cash expense relating to the beneficial conversion
feature of convertible notes payables during the three months ended March 31, 2017 as compared to the same period of the prior
year.
Results
of Operations – Nine months Ended March 31, 2017 compared to March 31, 2016
We
had a net loss of $1,107,725 in the nine months ended March 31, 2017 compared to net loss of $1,293,937 in the nine months ended
March 31, 2016.
Revenues
Details
of revenues are as follows:
|
|
Nine
months Ended March 31,
|
|
Increase
(Decrease)
|
|
|
2017
|
|
2016
|
|
$
|
|
%
|
Mobile
Banking Technology
|
|
$
|
120,000
|
|
|
$
|
198,524
|
|
|
$
|
(78,524
|
)
|
|
|
(39.6
|
)
|
Barcode
Technology (Sold September 30, 2015)
|
|
|
—
|
|
|
|
133,714
|
|
|
|
(133,714
|
)
|
|
|
(100.0
|
)
|
Other
revenue, related party
|
|
|
143,791
|
|
|
|
38,066
|
|
|
|
105,725
|
|
|
|
277.7
|
|
Total
Revenues
|
|
$
|
263,791
|
|
|
$
|
370,304
|
|
|
$
|
(106,513
|
)
|
|
|
(28.8
|
)
|
Mobile
Banking Technology
Mobile
Banking Technology revenues include products such as the Company’s Blinx On-Off™ prepaid toggle Card and its Open
Loop/Close Loop System and Bio ID Card Platform. Mobile Banking Technology uses web-based mobile technology to offer financial
cardholders the very best technology in conducting secure financial transactions in real time, protecting personal identity, and
financial account security. Mobile Banking Technology revenues for the nine months ended March 31, 2017 and 2016 were $120,000
and $198,524, respectively. The decrease in Mobile Banking Technology revenues was due to both the conclusion of certain long
term contracts during the prior year and the Company not having a bank to sponsor its mobile banking solutions during the nine
months ended March 31, 2017 (see Note 1 to Consolidated Financial Statements).
Barcode
Technology (Sold September 30, 2015)
On
December 31, 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 nine
months ended March 31, 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 $143,791 and $38,066, from the barcode technology
business during the nine months ended March 31, 2017 and 2016, respectively.
Cost
of Sales
Cost
of sales for the nine months ended March 31, 2017 and 2016, totaled $203,082 and $250,310, respectively. The decrease in cost
of sales was primarily from expense reductions, including bank sponsor fees, associated with our decline in Mobile Banking Technology
revenues discussed above, as compared to the same period of the prior year.
Operating
Expenses
General
and administrative expenses for the nine months ended March 31, 2017 were $550,922 compared to $567,468 for nine months ended
March 31, 2016. The decrease in general and administrative expenses was primarily from expense reductions implemented during the
period due to our reduction in Mobile Banking Technology revenues discussed above, offset by an increase in general and administrative
expenses realized from the creation and operation of its new division, Public Bell, Inc. (See Note 1 of the Condensed Consolidated
Financial Statements). No similar activity occurred during the same period of the prior year.
Sales
and marketing expenses for the nine months ended March 31, 2017 were $62,586 compared to $16,641 for nine months ended March 31,
2016. The increase in sales and marketing expenses was primarily from the recording of a $50,000 expense relating to an Exclusive
Products Provider Agreement (See Note 9 of the Condensed Consolidated Financial Statements). No similar activity occurred during
the same period of the prior year.
Research
and development expenses for the nine months ended March 31, 2017 were $87,491 compared to $59,064 for nine months ended March
31, 2016. The increase in expenses was primarily related to software development expenses relating to the development of assets
acquired during the period (see Note 2 of the Condensed Consolidated Financial Statements).
Other
Income (Expenses)
During
the nine months ended March 31, 2017, the Company recorded a gain on settlement of $364,690 (see Note 3 to Consolidated Financial
Statements). No similar activity occurred during the same period of the prior year.
During
the nine months ended March 31, 2017, the Company recognized an expense related to the fair value of derivatives liabilities of
$664,000. No similar activity occurred during the same period of the prior year.
Interest
expense and financing costs for the nine months ended March 31, 2017 and 2016, was $168,121 and $770,758, 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 nine months ended March 31, 2017.
Capital
Expenditures and Commitments
No
capital purchases were made during the nine months ended March 31, 2017.
Liquidity
Our
cash balance at March 31, 2017 decreased to $53,400 as compared to $60,953 at June 30, 2016. The decrease was the result of $894,659
in cash used in operating activities offset by $887,106 in cash provided by financing activities. Net cash used in operations
during the nine months ended March 31, 2017 was $894,659 compared with $319,142 of net cash used in operations during the same
period of the prior year. Cash used in operations during the nine months ended March 31, 2017 was primarily due to our net loss
in the period of $1,107,725. Net cash provided by financing activities of $887,106 during
the nine months ended March 31, 2017 was due to proceeds received from notes payable of $887,106. During the same period of the
prior year, net cash provided by financing activities of $563,246 was from proceeds received from notes payable of $565,746 offset
by payments of $2,500 on notes payable.
The
accompanying Condensed Consolidated Financial Statements have been prepared assuming the Company will continue as a going concern,
which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. During the nine
months ended March 31, 2017, the Company used cash in operating activities of $894,659, and at March 31, 2017, the Company had
a working capital deficit of $4,171,869 and a stockholders’ deficiency of $4,105,897. In addition, as of March 31, 2017,
the Company is delinquent in payment of $718,218 of its notes payable. These factors, among others, raise substantial doubt about
our ability to continue as a going concern. In addition, 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 $51,400 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 March 31, 2017, the total amount of the remaining
one-year lease commitment is $12,750.
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
Note 1 of the Condensed Consolidated Financial Statements for a discussion of recently issued accounting standards.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
A
smaller reporting company is not required to provide the information required by this Item 3.
ITEM
4. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures.
Our
management, with the participation of our chief executive officer and our chief financial officer, carried out an evaluation of
the effectiveness of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 (the
“Exchange Act”) Rules 13a-15(e) and 15-d-15(e)) as of the end of the period covered by this report (the “Evaluation
Date”). Based upon that evaluation, our chief executive officer and our chief financial officer concluded that,
as of the Evaluation Date, our disclosure controls and procedures were not effective to ensure that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported,
within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to our management,
including our chief executive officer and our chief financial officer, as appropriate to allow timely decisions regarding required
disclosure. As of March 31, 2017, our disclosure controls and procedures were not effective at the reasonable assurance
level due to the material weaknesses in our internal control over financial reporting described in our Form 10-K at June 30, 2016.
Changes
in Internal Control over Financial Reporting.
In
our Form 10-K at June 30, 2016, we identified certain matters that constitute material weaknesses (as defined under the Public
Company Accounting Oversight Board Auditing Standard No. 2) in our internal control over financial reporting as discussed on Management’s
Report on Internal Control Over Financial Reporting. We are undergoing ongoing evaluation and improvements in our internal
control over financial reporting. Regarding our identified weaknesses, we have performed the following remediation
efforts:
|
•
|
We
have assigned our audit committee with oversight responsibilities.
|
|
•
|
Our
financial statements, periodic reports filed pursuant to the Securities Exchange Act
of 1934, as amended, our monthly bank statements and imaged checks are now continuously
reviewed by our chief financial officer and chief executive officer.
|
|
•
|
All
significant contracts are now being reviewed and approved by our board of directors in
conjunction with the chief executive officer.
|
There
was no other change in our internal control over financial reporting that occurred during the period covered by this report that
has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART
II
ITEM
1. LEGAL PROCEEDINGS
The
Company is subject to various legal proceedings from time to time in the ordinary course of business, none of which is required
to be disclosed under this Item 1.
ITEM
1A. RISK FACTORS
A
smaller reporting company is not required to provide the information required by this Item.
ITEM
2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
The
Company is in default on its various notes payable totaling $718,218 representing principal and accrued interest as of March 31,
2017.
ITEM
4. MINE SAFETY DISCLOSURES
Not
applicable.
ITEM
5. OTHER INFORMATION
Not
applicable.
ITEM
6. EXHIBITS
31.1
|
Certification of Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
|
32.1**
|
Certification of Chief Executive Officer pursuant
to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
101.1
|
The
following financial information from Veritec, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31,
2017 formatted in XBRL: (i) Condensed Consolidated Balance Sheets at March 31, 2017 and June 30, 2016; (ii) Condensed
Consolidated Statements of Operations for the three and nine months ended March 31, 2017 and 2016; (iii) Condensed Consolidated
Statement of Stockholders’ Deficit as at March 31, 2017; (iv) Condensed Consolidated Statements of Cash Flows for
the nine months ended March 31, 2017 and 2016; (v) Notes to the Condensed Consolidated Financial Statements.
|
**
|
The certifications
attached as Exhibits 32.1 and 32.2 accompany the Quarterly on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 and shall not be deemed “filed” by Veritec, Inc. for purposes of Section 18 of the Securities
Exchange Act.
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
|
|
VERITEC, INC.
|
|
|
|
May 22, 2017
|
By:
|
/s/
Van Tran
|
|
|
Van Tran
|
|
|
Chief Executive Officer
|
|
|
(Principal Executive Officer)
|