VERITEC,
INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED JUNE 30, 2017 AND 2016
|
|
Fiscal
Years Ended Juned 30,
|
|
|
2017
|
|
2016
|
CASH FLOWS FROM OPERATING
ACTIVITIES
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(1,369,807
|
)
|
|
$
|
(1,298,088
|
)
|
Adjustments
to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
171
|
|
|
|
412
|
|
Amortization
|
|
|
64,166
|
|
|
|
64,167
|
|
Allowance
for inventory obsolescence
|
|
|
—
|
|
|
|
14,461
|
|
Shares
to be issued for services
|
|
|
—
|
|
|
|
2,100
|
|
Gain
on settlement of note payable to former officer
|
|
|
(364,686
|
)
|
|
|
—
|
|
Expense
related to fair value of derivative liabilities
|
|
|
182,000
|
|
|
|
—
|
|
Change
in fair value of derivative liabilities
|
|
|
546,000
|
|
|
|
|
|
Beneficial
conversion feature on issuance of convertible notes payable-related party
|
|
|
35,000
|
|
|
|
135,045
|
|
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
|
|
Interest
accrued on notes payable
|
|
|
184,960
|
|
|
|
136,100
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
1,170
|
|
|
|
(11,623
|
)
|
Restricted
cash
|
|
|
—
|
|
|
|
63,029
|
|
Prepaid
expenses
|
|
|
(88
|
)
|
|
|
16,337
|
|
Payroll
tax liabilities
|
|
|
(238,718
|
)
|
|
|
(214,559
|
)
|
Deferred
revenues
|
|
|
(66,268
|
)
|
|
|
(353,843
|
)
|
Accounts
payable
|
|
|
(1,207
|
)
|
|
|
(6,337
|
)
|
Accrued
expenses
|
|
|
(3,273
|
)
|
|
|
52,417
|
|
Customer
deposits
|
|
|
—
|
|
|
|
(482
|
)
|
Net
cash used in operating activities
|
|
|
(1,030,580
|
)
|
|
|
(812,094
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds
from convertible notes payable-related party
|
|
|
477,500
|
|
|
|
574,389
|
|
Proceeds
from notes payable-related party
|
|
|
538,820
|
|
|
|
248,396
|
|
Payment
on notes payable-related party
|
|
|
—
|
|
|
|
(2,500
|
)
|
Net
cash provided by financing activities
|
|
|
1,016,320
|
|
|
|
820,285
|
|
|
|
|
|
|
|
|
|
|
NET DECREASE IN CASH
|
|
|
(14,260
|
)
|
|
|
8,191
|
|
CASH AT BEGINNING
OF PERIOD
|
|
|
60,953
|
|
|
|
52,762
|
|
CASH AT END OF PERIOD
|
|
$
|
46,693
|
|
|
$
|
60,953
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
NON CASH INVESTING
AND FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Related
party capital contribution on sale of assets offset to related party notes payable balance
|
|
$
|
—
|
|
|
$
|
670,000
|
|
Related
party accounts receivable offset to related party notes payable
|
|
$
|
—
|
|
|
$
|
41,063
|
|
Conversion
of notes payable into common stock
|
|
$
|
—
|
|
|
$
|
1,775,434
|
|
Reclassification
of customer deposit to accounts payable
|
|
$
|
25,000
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
|
VERITEC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE FISCAL YEARS ENDED JUNE 30, 2017 AND 2016
NOTE
1 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The
Company
Veritec,
Inc. (Veritec) was formed in the State of Nevada on September 8, 1982. Veritec’s wholly owned subsidiaries include 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
banking solutions.
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.
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Intercompany
transactions and balances were eliminated in consolidation.
Use
of Estimates
The
preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States
of America requires management to make estimates and assumptions that may affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts
of revenues and expenses during the reporting period. Actual results could differ from those estimates. Those estimates and assumptions
include estimates for reserves of uncollectible accounts, analysis of impairments of long lived assets, accruals for potential
liabilities, assumptions made in valuing stock instruments issued for services, and valuation of deferred tax assets.
Accounts
Receivable
The
Company sells to domestic and foreign companies and grants uncollateralized credit to customers, but requires deposits on unique
orders. Management periodically reviews its accounts receivable and provides an allowance for doubtful accounts after analyzing
the age of the receivable, payment history and prior experience with the customer. The estimated loss that management believes
is probable is included in the allowance for doubtful accounts.
While
the ultimate loss may differ, management believes that any additional loss will not have a material impact on the Company's financial
position. Due to uncertainties in the settlement process, however, it is at least reasonably possible that management's estimate
will change during the near term.
Concentrations
During
the year ended June 30, 2017, the Company had one customer, a related party, that represented 53% of our revenues and one customer
that represented 14% of our revenues. No other customer represented more than 10% of our revenues.
During
the year ended June 30, 2016, the Company had one customer, a related party, that represented 37% of our revenues and one customer
that represented 10% of our revenues. No other customer represented more than 10% of our revenues.
During
the year ended June 30, 2017, the Company had no foreign revenues. During the year ended June 30, 2016, foreign revenues accounted
for 19% (6% Korea, 8% Taiwan and 5% others) of the Company’s total revenues.
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 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
June 30, 2017, the Company’s Consolidated Balance Sheet included the fair value of derivative liabilities of $728,000, 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 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.
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 mobile banking technology, management fee revenue, and barcode technology.
a.
Mobile Banking Revenue
The
Company, as a merchant payment processor and a distributor, recognizes revenue from transaction fees charged to 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.
Prior
to the year ended June 30, 2016, the Company entered into certain long term agreements to provide application development and
support. Some customers paid the agreement in full at signing and the Company recorded the receipt of payment as deferred revenue.
The Company records revenue relating to these agreements on a pro-rata basis over the term of the agreement and reduces its deferred
revenue balance accordingly.
b.
Management Fee Revenue
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 (see Note 9) and entered into a management services agreement with The Matthews Group to manage all facets
of the barcode technology operations, on behalf of The Matthews Group, through July 31, 2018. The Company earns a fee of 20% of
all revenues billed from the barcode technology operations up to May 31, 2017 and 35% of all revenues billed up to July 31, 2018.
c.
Barcode Technology Revenue
The
Company’s Barcode Technology was 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 recognized revenues from perpetual licenses and related identification
cards when the product was shipped, the Company no longer had any service or other continuing obligations, and collection was
reasonably assured. The process typically began with a customer purchase order detailing its specifications so the Company could
import its software into the customer's hardware. Once importation is completed, if the customer only wished to purchase a license,
the Company typically transmitted the software to the customer via the Internet. Revenue was recognized at that point. If the
customer requested both license and hardware, once the software was imported into the hardware and the process was complete, the
product was shipped, and revenue was recognized at time of shipment. Once the software and/or other products was either shipped
or transmitted, the customers did not have a right of refusal or return.
On
September 30, 2015, the Company and The Matthews Group, a related party, entered into an Asset Purchase Agreement pursuant to
which the Company sold the intellectual property assets relating to its Barcode Technology. Barcode Technology revenue for the
year ended June 30, 2016 represents the revenue earned from July 1, 2015 to September 30, 2015, the date it was sold.
Research
and Development
Research
and development costs are expensed as incurred.
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 stock outstanding plus the number of
additional common stock that would have been outstanding if all dilutive potential common stock had been issued, using the treasury
stock method. Potential common stock are excluded from the computation as their effect is antidilutive.
For
the years ended June 30, 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.
As
of June 30, 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.
|
|
June
30,
|
|
|
2017
|
|
2016
|
Series
H Preferred Stock
|
|
|
10,000
|
|
|
|
10,000
|
|
Convertible
Notes Payable
|
|
|
17,833,166
|
|
|
|
11,815,803
|
|
Options
|
|
|
2,500,000
|
|
|
|
2,510,000
|
|
Total
|
|
|
20,343,166
|
|
|
|
14,335,803
|
|
Stock-Based
Compensation
The
Company periodically issues stock options and warrants to employees and non-employees in capital raising transactions, for services
and for financing costs. The Company accounts for stock option and stock warrant grants to employees based on the authoritative
guidance provided by the Financial Accounting Standards Board (FASB) where the value of the award is measured on the date of grant
and recognized over the vesting period. The Company accounts for stock option and stock warrant grants to non-employees in accordance
with the authoritative guidance of the FASB where the value of the stock compensation is determined based upon the measurement
date at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance
to earn the equity instruments is complete. Non-employee stock-based compensation charges generally are amortized over the vesting
period on a straight-line basis. In certain circumstances where there are no future performance requirements by the non-employee,
option or warrant grants are immediately vested and the total stock-based compensation charge is recorded in the period of the
measurement date.
The
fair value of the Company’s common stock option and warrant grants are estimated using a Black-Scholes option pricing model,
which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the common stock options,
and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes option pricing model,
and based on actual experience. The assumptions used in the Black-Scholes option pricing model could materially affect compensation
expense recorded in future periods.
Intangible
Assets
The
Company accounts for intangible assets in accordance with the authoritative guidance issued by the FASB. Intangibles are valued
at their fair market value and are amortized taking into account the character of the acquired intangible asset and the expected
period of benefit. The Company evaluates intangible assets for impairment, at a minimum, on an annual basis and whenever events
or changes in circumstances indicate that the carrying value may not be recoverable from its estimated undiscounted future cash
flows. Recoverability of intangible assets is measured by comparing their net book value to the related projected undiscounted
cash flows from these assets, considering a number of factors, including past operating results, budgets, economic projections,
market trends and product development cycles. If the net book value of the asset exceeds the related undiscounted cash flows,
the asset is considered impaired, and a second test is performed to measure the amount of impairment loss.
At
June 30, 2017, the intangibles assets of $16,042 relates to our acquisition of Tangible Payments LLC during fiscal year 2016 (see
Note 3). Management believes there were no indications of impairment based on management’s assessment of these assets at
June 30, 2017. Factors we consider important that could trigger an impairment review include significant underperformance relative
to historical or projected future operating results, significant changes in the manner of the use of our assets or the strategy
for our overall business, and significant negative industry or economic trends. If current economic conditions worsen causing
decreased revenues and increased costs, we may have to record an impairment to our intangible assets.
Income
Taxes
The
Company accounts for income taxes using the asset and liability method whereby deferred tax assets are recognized for deductible
temporary differences, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are
the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by
a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred
tax assets will be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates
on the date of enactment.
Recently
Issued Accounting Standards
In
May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09,
Revenue
from Contracts with Customers
. ASU 2014-09 is a comprehensive revenue recognition standard that will supersede nearly all
existing revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue
recognition. 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 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, and ASU 2016-20 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
. 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 period presented in the financial statements. The Company is currently evaluating the expected impact that the
standard could have on its financial statements and related disclosures.
In
July 2017, the FASB issued ASU 2017-11
, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480);
Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II)
Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain
Mandatorily Redeemable Noncontrolling Interests with a Scope Exception
. ASU 2017-11 allows companies to exclude a down round
feature when determining whether a financial instrument (or embedded conversion feature) is considered indexed to the entity’s
own stock. As a result, financial instruments (or embedded conversion features) with down round features may no longer be required
to be accounted for as derivative liabilities. A company will recognize the value of a down round feature only when it is triggered
and the strike price has been adjusted downward. For equity-classified freestanding financial instruments, an entity will treat
the value of the effect of the down round as a dividend and a reduction of income available to common shareholders in computing
basic earnings per share. For convertible instruments with embedded conversion features containing down round provisions, entities
will recognize the value of the down round as a beneficial conversion discount to be amortized to earnings. The guidance in ASU
2017-11 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early
adoption is permitted, and the guidance is to be applied using a full or modified retrospective approach. The adoption of ASU
2017-11 is expected to have a material impact on the Company’s financial statements and related disclosures because derivative
liabilities from financial instruments (or embedded conversion features) that have down round features will be reclassified from
liabilities to additional paid-in capital, effective as of the beginning of the fiscal year.
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 - 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 year ended
June 30, 2017, the Company used cash in operating activities of $1,030,580, and at June 30, 2017, the Company had a working capital
deficit of $4,429,021 and a stockholders’ deficiency of $4,567,979. In addition, as of June 30, 2017, the Company is delinquent
in payment of $726,838 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, 2017 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 2018 and to continue to develop its
existing projects and plans to raise such funds by finding additional investors to purchase the Company’s securities, generating
sufficient sales revenue, implementing dramatic cost reductions or any combination thereof. There is no assurance that the Company
can be successful in raising such funds, generating the necessary sales or reducing major costs. Further, if the Company is successful
in raising such funds from sales of equity securities, the terms of these sales may cause significant dilution to existing holders
of common stock. The consolidated financial statements do not include any adjustments that may result from this uncertainty.
NOTE
3 – 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 $1,300,000. For the years ended June 30, 2017 and 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 will be amortized over a three year period. For
the years ended June 30, 2017 and 2016, the Company recorded $64,166 and $64,167 of amortization expense related to this intangible
which is included in general and administrative expense in the Consolidated Statements of Operations.
Total
remaining balance of amortization expense of $16,042 was expensed-in-full during the three months ended September 30, 2017.
NOTE
4 – NOTES PAYABLE
Notes
payable-in default
Notes
payable includes principal and accrued interest and consists of the following at June 30, 2017 and June 30, 2016:
|
|
|
|
June
30,
2017
|
|
June
30,
2016
|
(a)
|
|
Convertible
notes-in default
|
|
$
|
205,116
|
|
|
$
|
195,655
|
|
(b)
|
|
Notes
payable-in default
|
|
|
370,207
|
|
|
|
352,729
|
|
|
|
Total
notes-third parties
|
|
$
|
575,323
|
|
|
$
|
548,384
|
|
(a)
The notes are unsecured, convertible into common stock at amounts ranging from $0.08 to $0.30 per share, bear interest at rates
ranging from 5% to 8% per annum, were due through 2011 and are in default or due on demand.
At June 30, 2015, convertible notes totaled $186,194 and during the year ended June 30, 2016, interest of $9,461 was added to
principal, leaving a balance owed of $195,655 at June 30, 2016. During the year ended June 30, 2017, interest of $9,461 was added
to principal leaving a balance owed of $205,116 at June 30, 2017. At June 30, 2017, $168,506 of the convertible notes were in
default, and convertible at a conversion price of $0.30 per share into 561,688 shares of the Company’s common stock. The
balance of $36,610 is due on demand and convertible at a conversion price of $0.08 per share into 457,616 shares of the Company’s
common stock.
(b)
The notes and either secured by the Company’s intellectual property or unsecured and bear interest ranging from 6.5% to
10% per annum, due in 2012, and in default.
At
June 30, 2015, the notes totaled $335,252 and during the year ended June 30, 2016, interest of $17,477 was added to principal,
leaving a balance owed of $352,729 at June 30, 2016. During the year ended June 30, 2017, interest of $17,478 was added to principal
leaving a balance owed of $370,207 at June 30, 2017. At June 30, 2017, $334,424 of notes are secured by the Company’s intellectual
property and $35,783 of notes are unsecured,
Notes
payable-related party
Notes
payable-related party includes principal and accrued interest and consists of the following at June 30, 2017 and June 30, 2016:
|
|
|
|
June
30,
2017
|
|
June
30,
2016
|
(c)
|
|
Convertible
notes-The Matthews Group
|
|
|
$ 1
,236,943
|
|
|
$
|
669,648
|
|
(d)
|
|
Notes
payable-The Matthews Group
|
|
|
805,195
|
|
|
|
216,648
|
|
(e)
|
|
Convertible
notes-other related-in default
|
|
|
251,728
|
|
|
|
237,725
|
|
(f)
|
|
Convertible
notes-former officer
|
|
|
—
|
|
|
|
360,190
|
|
|
|
Total
notes-related party
|
|
$
|
2,293,866
|
|
|
$
|
1,484,211
|
|
(c)
The notes are unsecured, convertible into common stock at $0.08 per share, bear interest at rates ranging from 8% to 10% per annum,
and are due on demand.
The
Matthews Group (see Note 9) 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, 2015, convertible notes due to The Matthews Group was $2,496,974. During the year ended June 30, 2016,
$549,389 of convertible notes were issued, interest of $68,719 was added to principal, $1,775,434 of outstanding balances were
converted into shares of common stock and $670,000 was settled upon the sale of assets. On September 28, 2015, the Company agreed
to replace a convertible note payable for $200,000 that was in default (the original note) with another convertible note payable
for $200,000 (the replacement note). The original note was for $200,000, secured, 8% interest rate, and convertible into common
stock at a rate of $0.25 per share. The replacement note is for $200,000, unsecured, 10% interest rate, and convertible into common
stock at a rate of $0.08 per share. The Company determined that the change in the fair value of the conversion option was more
than 10% of the carrying value of the original note and recorded a loss on extinguishment of $136,000. The $136,000 is included
in interest expense and additional paid in capital during the year ended June 30, 2016. During the year ended June 30, 2016, the
Company recorded a beneficial conversion feature on issuance of the notes of $135,045 which is included in interest expense in
the Consolidated Statements of Operations. At June 30, 2016, convertible notes due to The Matthews Group totaled $669,648.
During
the year ended June 30, 2017, $477,500 of convertible notes were issued and interest of $89,795 was added to principal leaving
a balance owed to $1,236,943 at June 30, 2017. The Company determined that upon issuance of the convertible notes, the embedded
conversion features of the notes were not considered indexed to the Company’s own stock and accordingly, the embedded conversion
features were bifurcated and recorded as derivative liabilities with a corresponding discount to the related notes. The Company
determined the fair value of the embedded conversion features was $182,000 upon issuance (see Note 5) which was expensed immediately
and included in interest expense.
(d)
The notes are unsecured, accrue interest at 10% per annum, and are due on demand. The notes were issued relating to a management
services agreement with The Matthews Group (see Note 9) dated September 30, 2015. During the year ended June 30, 2016, $207,333
of notes payable were issued and interest of $9,315 was added to principal leaving a balance due of $216,648 at June 30, 2016.
During the year ended June 30, 2017, $538,820 of notes payable were issued and interest of $49,727 was added to principal leaving
a balance owed of $805,195.
(e)
The notes are due to a current and a former director, are unsecured, convertible into common stock at per share amounts ranging
from $0.10 to $0.30, and bear interest at rates ranging from 8% to 10% per annum.
At
June 30, 2015, convertible notes due other related parties totaled $201,978. During the year ended June 30, 2016, $25,000 of notes
payable were issued, a payment of $2,500 was made, and interest of $13,247 was added to principal leaving a balance owed of $237,725
at June 30, 2016. During the year ended June 30, 2017, interest of $14,003 was added to principal leaving a balance owed of $251,728
at June 30, 2017. At June 30, 2017, $188,124 of the notes were due in 2010 and are in default, and the balance of $63,604 is due
on demand. At June 30, 2017, $188,124 of the notes are convertible at a conversion price of $0.30 per share into 627,081 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 $40,099 of the notes are convertible at a conversion price of $0.08 per share
into 501,238 shares of the Company’s common stock.
(f)
The notes are unsecured, bear interest at 10% per annum, and are in default.
At
June 30, 2015, notes payable totaled $342,190. During the year ended June 30, 2016, interest of $18,000 was added to principal
leaving a balanced owed of $360,190 at June 30, 2016. During the year ended June 30, 2017, interest of $4,500 was added to principal
and on September 21, 2016, the Company entered into a settlement agreement with an individual who was a former officer of the
Company. The individual in prior years 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 Consolidated Statements of Operations for the year ended June 30, 2017. As of June 30, 2017, the 500,000 shares
have not been relinquished. When the Company receives the shares, it will record a cancellation of shares.
NOTE
5 - 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 year ended June 30, 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.
Based on this, the Company recorded derivative liabilities of $182,000 upon the issuance of certain convertible notes (see Note
4). Subsequent to this recording and through June 30, 2017, the Company recorded a change in the fair value of the derivative
liabilities of $546,000. At June 30, 2017, total derivative liabilities were $728,000. The conversion feature of the notes is
re-measured at the end of every reporting period with the change in value reported in the Consolidated Statements of Operations.
The
derivative liability was valued at the following dates using a Black-Scholes-Merton model with the following assumptions:
|
|
June
30,
2017
|
|
July
11,
2016
to
December
31, 2016 (dates of inception)
|
Conversion
feature:
|
|
|
|
|
|
|
|
|
Risk-free
interest rate
|
|
|
1.5
|
%
|
|
|
0.07
|
%
|
Expected
volatility
|
|
|
179
|
%
|
|
|
99%
to 124%
|
|
Expected
life (in years)
|
|
|
1
- 2.5 years
|
|
|
|
1-1.5
years
|
|
Expected
dividend yield
|
|
|
—
|
|
|
|
—
|
|
Fair
Value:
|
|
|
|
|
|
|
|
|
Conversion
feature
|
|
$
|
728,000
|
|
|
$
|
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
6 - STOCKHOLDERS’ DEFICIENCY
Preferred
Stock
The
articles of incorporation of Veritec authorize 10,000,000 shares of preferred stock with a par value of $1.00 per share. The Board
of Directors is authorized to determine any number of series into which shares of preferred stock may be divided and to determine
the rights, preferences, privileges and restrictions granted to any series of the preferred stock.
In
1999, a new Series H convertible preferred stock was authorized. Each share of Series H convertible preferred stock is convertible
into 10 shares of the Veritec’s common stock at the option of the holder. As of June 30, 2017 and 2016, there were 1,000
shares of Series H convertible preferred stock issued and outstanding.
Common
Stock
On
September 30, 2015, the Company agreed to convert $1,775,434 of various convertible notes payable to The Matthews Group, a related
party, into 22,192,919 shares of common stock, or $0.08 per share (see Note 9).
During
the year ended December 31, 2016, the Company issued 815,000 share of common stock in settlement of previously recorded obligations
of common stock to be issued in prior years.
Common
Stock to be Issued
On
July 15, 2014, the Company entered into a consulting agreement with a consultant, which included, among other things, monthly
compensation of 5,000 shares of common stock. As of June 30, 2015, 50,000 shares of common stock with a value of $7,400 have not
been issued and are included in common stock to be issued in the accompanying consolidated balance sheet. The consulting agreement
was terminated on October 31, 2015. During the year ended June 30, 2016, the Company recorded an obligation to issue an additional
20,000 shares of common stock with an aggregate fair value of $2,100. As of June 30, 2017, the 70,000 shares of common stock with
a value of $9,500 have not been issued and are included in common stock to be issued in the accompanying consolidated balance
sheet.
During
the year ended June 30, 2012, the Company granted an aggregate of 75,000 shares of the Company’s common stock to the Company’s
directors for services rendered and recognized as stock based compensation expense during the year ended June 30, 2012 based on
their fair value at grant dates in the aggregate amount of $3,000. The shares due were not issued as of June 30, 2017 and were
reflected as common stock to be issued in the accompanying consolidated balance sheet.
As
of both June 30, 2017 and 2016, 145,000 shares of common stock to be issued with an aggregate value of $12,500 have not been issued
and are reflected as common stock to be issued in the accompanying Consolidated Balance Sheets, respectively.
NOTE
7 – STOCK OPTIONS
A
summary of stock options as of June 30, 2017 and for the two years then ended is as follows:
|
|
Number
of Shares
|
|
Weighted
- Average Exercise Price
|
Outstanding
at June 30, 2015
|
|
|
2,520,000
|
|
|
$
|
0.08
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Forfeited
|
|
|
(10,000
|
)
|
|
$
|
0.08
|
|
Outstanding
at June 30, 2016
|
|
|
2,510,000
|
|
|
$
|
0.08
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Forfeited
|
|
|
(10,000
|
)
|
|
$
|
0.08
|
|
Outstanding
at June 30, 2017
|
|
|
2,500,000
|
|
|
$
|
0.08
|
|
Exercisable
at June 30, 2017
|
|
|
2,500,000
|
|
|
$
|
0.08
|
|
The
Company has agreements with certain employees that provide for five years of annual grants of options, on each employment anniversary
date, to purchase shares of the Company’s common stock. The option price is determined based on the market price on the
date of grant, the options vest one year from the date of grant, and the options expire five years after vesting. The Company
granted 2,500,000 options under this arrangement 2013. There were no options granted in 2017 and 2016 under this agreement. The
Company recognized no stock-based compensation expense related to stock options during the years ended June 30, 2017 and 2016,
respectively. As of June 30, 2017, there was no remaining unrecognized compensation costs related to stock options. The intrinsic
value of both outstanding and exercisable stock options was approximately $100,000 at June 30, 2017.
The
fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model that uses the weighted-average
assumptions noted in the following table. The risk-free rate for periods within the contractual life of the options is based on
the U. S. Treasury yield in effect at the time of the grant. Volatility was based on the historical volatility of the Company’s
common stock. The Company estimated the expected life of options based on historical experience and other averaging methods.
Additional
information regarding options outstanding as of June 30, 2017 is as follows:
Options
Outstanding at June 30, 2017
|
|
Options
Exercisable at June 30, 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
|
|
|
|
2.64
|
|
|
$
|
0.08
|
|
|
|
2,500,000
|
|
|
$
|
0.08
|
|
|
|
|
|
|
2,500,000
|
|
|
|
|
|
|
|
|
|
|
|
2,500,000
|
|
|
|
|
|
NOTE
8 - INCOME TAXES
For
the years ended June 30, 2017 and 2016, our net losses were $1,369,807 and $1,298,088, respectively, and no provision for income
taxes was recorded. We made no provision for income taxes due to our utilization of federal net operating loss carry forwards
to offset both regular taxable income and alternative minimum taxable income.
Reconciliation
between the expected federal income tax rate and the actual tax rate is as follows:
|
|
Year
Ended June 30,
|
|
|
2017
|
|
2016
|
Federal
statutory tax rate
|
|
|
35
|
%
|
|
|
35
|
%
|
State
tax, net of federal benefit
|
|
|
6
|
%
|
|
|
6
|
%
|
Total
tax rate
|
|
|
40
|
%
|
|
|
40
|
%
|
Allowance
|
|
|
(40)
|
%
|
|
|
(40)
|
%
|
Effective
tax rate
|
|
|
–
|
%
|
|
|
–
|
%
|
The
following is a summary of the deferred tax assets:
|
|
Year
Ended June 30,
|
|
|
2017
|
|
2016
|
Net
operating loss carryforwards
|
|
$
|
4,665,000
|
|
|
$
|
4,350,000
|
|
Derivative
liabilities
|
|
|
290,000
|
|
|
|
—
|
|
Intangibles,
net
|
|
|
70,000
|
|
|
|
45,000
|
|
Deferred
tax assets before valuation allowance
|
|
|
5,025,000
|
|
|
|
4,395,000
|
|
Valuation
allowance
|
|
|
(5,025,000
|
)
|
|
|
(4,395,000
|
)
|
Net
deferred tax asset
|
|
$
|
—
|
|
|
$
|
—
|
|
The
Company has provided a valuation allowance on the deferred tax assets at June 30, 2017 and 2016 to reduce such asset to zero,
since there is no assurance that the Company will generate future taxable income to utilize such asset. Management will review
this valuation allowance requirement periodically and make adjustments as warranted. The net change in the valuation allowance
for the year ended June 30, 2017 was an increase of $315,000.
Veritec
has net operating loss carryforwards of approximately $11,664,000 million for federal purposes available to offset future taxable
income that expire in varying amounts through 2035. The ability to utilize the net operating loss carry forwards could be limited
by Section 382 of the Internal Revenue Code which limits their use if there is a change in control (generally a greater than 50%
change in ownership). The Company is subject to examination by tax authorities for all years for which a loss carry forward is
utilized in subsequent periods.
The
Company follows FASB guidelines that address the determination of whether tax benefits claimed or expected to be claimed on a
tax return should be recorded in the financial statements. Under this guidance, we may recognize the tax benefit from an uncertain
tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities,
based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should
be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.
This guidance also provides guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim
periods and requires increased disclosures. As of June 30, 2017 and 2016, the Company did not have a liability for unrecognized
tax benefits, and no adjustment was required at adoption.
The
Company’s policy is to record interest and penalties on uncertain tax provisions as income tax expense. As of June 30, 2017
and 2016, the Company has no accrued interest or penalties related to uncertain tax positions.
NOTE
9 – 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 Note 4).
Management
Services Agreement and Related Notes Payable with Related Party
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 July 31, 2018. 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 up
to May 31, 2017 and 35% of all revenues up to July 31, 2018 from the barcode technology operations. During the year ended June
30, 2017 and 2016, the Company recorded management fee revenue related to this agreement of $172,930 and $69,135, 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 year ended June
30, 2017 and 2016, cash flow loans of $538,820 and $248,396, respectively, were made to the Company at 10% interest per annum
and due on demand. At June 30, 2017, cash flow loans of $805,195 are due to The Matthews Group (see Note 4).
On
September 30 2015, the Company sold its Barcode Technology assets to The Matthews Group for $670,000 in settlement of various
convertible notes payables due to The Matthews Group (see Note 4). The cost basis of the Barcode Technology assets were zero,
resulting in a gain of $670,000. As the transaction was between the Company and The Matthews Group, a related party, the Company
accounted for the gain as a capital contribution.
Convertible
Notes Activity with Related Parties (see Note 4)
During
the year ended June 30, 2017, the Company issued $477,500 of convertible notes payable to The Matthews Group. The convertible
notes payable-related party can be converted at a price of $0.08 per share. The market price on the date some of the convertible
notes payable-related party were issued was in excess of the conversion price, and as a result the Company recognized an expense
of $35,000 which is included in interest expense.
During
the year ended June 30, 2016, the Company issued $549,389 of convertible notes payable to The Matthews Group and $25,000 of convertible
notes payable to Van Tran. The convertible notes payable-related party can be converted at a price of $0.08 per share. The market
price on the date some of the convertible notes payable-related party were issued was in excess of the conversion price, and as
a result the Company recognized an expense of $135,045 which is included in interest expense.
On
September 30, 2015, the Company agreed to convert $1,775,434 of various convertible notes payable to The Matthews Group into 22,192,919
shares of common stock, or $0.08 per share. The transaction included $702,797 of notes that were converted at less than their
stated conversion prices which ranged from $0.10 per share to $0.33 per share. The Company determined this was an induced conversion
and calculated an inducement expense of $452,770, which represents the fair value of the additional number of common stock issued
as a result of the lower conversion price. The Company recorded the $452,770 in interest expense and additional paid in capital.
On
September 28, 2015, the Company agreed to replace a convertible note payable for $200,000 due to The Matthews Group that was in
default (the original note) with another convertible note payable for $200,000 due to The Matthews Group (the replacement note).
The original note was for $200,000, secured, 8% interest rate, and convertible into common stock at a rate of $0.25 per share.
The replacement note is for $200,000, unsecured, 10% interest rate, and convertible into common stock at a rate of $0.08 per share.
The Company determined that the change in the fair value of the conversion option was more than 10% of the carrying value of the
original note and recorded a loss on extinguishment of $136,000. The $136,000 is included in interest expense and finance costs
and additional paid in capital. No similar expense occurred during the same period of the prior year.
Advances
from Related Parties
As
of both June 30, 2017 and 2016, $96,110 of advances due to Ms. Van Tran have been presented as accounts payable, related party
on the accompanying Consolidated Balance Sheets. The advances are unsecured, non-interest bearing, and due on demand.
Other
Transactions with Related Parties
The
Company leases its office facilities from Ms. Tran. For both the years ended June 30, 2017 and 2016, rental payments to Ms. Van
Tran totaled $50,400.
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
the year ended June 30, 2017, the $50,000 paid to AHC was recorded to sales and marketing expense
in
the accompanying Consolidated Statements of Operations.
NOTE
10 – 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 June 30, 2017, the JV has not received funding and the Company is currently
evaluating its options related to the JV including its termination.
Incentive
Compensation Bonus Plan
On
December 5, 2008, the Company adopted an incentive compensation bonus plan to provide payments to key employees in the aggregated
amount of 10% of pre-tax earnings in excess of $3,000,000 after the end of each fiscal year to be distributed annually to employees.
As of June 30, 2017, the Company had not achieved an annual pre-tax earnings in excess of $3,000,000.