VERITEC,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
Three
months Ended
September
30,
|
|
|
2017
|
|
2016
|
|
|
(Unaudited)
|
|
(Unaudited)
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
289,335
|
|
|
$
|
142,758
|
|
Adjustments
to reconcile net income to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
—
|
|
|
|
101
|
|
Amortization
|
|
|
16,042
|
|
|
|
16,038
|
|
Gain
on settlement of note payable to former officer
|
|
|
—
|
|
|
|
(364,690
|
)
|
Change
in fair value of derivative liabilities
|
|
|
(463,000
|
)
|
|
|
—
|
|
Beneficial
conversion feature on issuance of convertible notes payable-related party
|
|
|
—
|
|
|
|
8,750
|
|
Interest
accrued on notes payable
|
|
|
57,061
|
|
|
|
38,248
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
1,249
|
|
|
|
2,029
|
|
Prepaid
expenses
|
|
|
890
|
|
|
|
(3,863
|
)
|
Accounts
payable
|
|
|
28,997
|
|
|
|
22,087
|
|
Accounts
payable – related party
|
|
|
4,577
|
|
|
|
—
|
|
Accrued
expenses
|
|
|
(11,460
|
)
|
|
|
(13,950
|
)
|
Payroll
tax liabilities
|
|
|
—
|
|
|
|
(87,018
|
)
|
Deferred
revenues
|
|
|
(12,501
|
)
|
|
|
(25,710
|
)
|
Net
cash used in operating activities
|
|
|
(88,810
|
)
|
|
|
(265,220
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds
from convertible notes payable-related party
|
|
|
—
|
|
|
|
124,000
|
|
Proceeds
from notes payable-related party
|
|
|
97,042
|
|
|
|
114,987
|
|
Net
cash provided by financing activities
|
|
|
97,042
|
|
|
|
238,987
|
|
|
|
|
|
|
|
|
|
|
NET
INCREASE (DECREASE) IN CASH
|
|
|
8,232
|
|
|
|
(26,233
|
)
|
CASH
AT BEGINNING OF PERIOD
|
|
|
46,693
|
|
|
|
60,953
|
|
CASH
AT END OF PERIOD
|
|
$
|
54,925
|
|
|
$
|
34,720
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
NON
CASH INVESTING AND FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Reclassification
of customer deposit to accounts payable
|
|
$
|
—
|
|
|
$
|
—
|
|
See
accompanying notes.
VERITEC,
INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 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
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. 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, the Company has seven U.S. and twenty-eight foreign pending patent applications.
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 months ended September 30, 2017 are not necessarily indicative of the results
that may be expected for the year ending June 30, 2018. The Condensed Consolidated Balance Sheet information as of June 30, 2017
was derived from the Company’s audited Consolidated Financial Statements as of and for the year ended June 30, 2017 included
in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on
October 10, 2017. 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 period
ended September 30, 2017, the Company incurred a loss from operations of $116,604 and used cash in operating activities of $88,810,
and at September 30, 2017, the Company had a working capital deficit of $4,123,645 and a stockholders’ deficiency of $4,278,644.
In addition, as of September 30, 2017, the Company is delinquent in payment of $735,457 of its notes payable. These factors, among
others, raise substantial doubt about our ability to continue as a going concern within one year of 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, 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 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 Sheet 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
September 30, 2017 and June 30, 2017, the Company’s Condensed Consolidated Balance Sheet included the fair value of derivative
liabilities of $265,000 and $728,000, respectively, which was based on Level 2 measurements.
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 months ended September 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. At September 30, 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 September 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.
|
|
As
of September 30,
|
|
|
2017
|
|
2016
|
Series
H Preferred Stock
|
|
|
10,000
|
|
|
|
10,000
|
|
Convertible
Notes Payable
|
|
|
18,274,580
|
|
|
|
12,298,052
|
|
Options
|
|
|
2,500,000
|
|
|
|
2,500,000
|
|
Total
|
|
|
20,784,580
|
|
|
|
14,808,052
|
|
Concentrations
During
the three months ended September 30, 2017, the Company had one customer, a related party, that represented 72% of our revenues
and one customer that represented 11% of our revenues. During the three months ended September 30, 2016, the Company had one customer,
a related party that represented 33% of our revenues and three other customers that represented an aggregate of 45% (19%, 15%
and 11%) of our revenue.
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 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 not expected to have a material impact on the Company’s financial statements because the embedded conversion
feature of the Company’s convertible notes have features other than down round provisions that require the current accounting
and classification as derivative liabilities.
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 AND CONTINGENT EARNOUT LIABILITY
In
2014, the Company acquired Tangible Payments LLC, which 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, 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.
From the date of the acquisition and up to September 30, 2017, 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 were amortized over a three year period. For the
three months ended September 30, 2017 and 2016, the Company recorded $16,042 and $16,038 of amortization expense related to this
intangible which is included in general and administrative expense in the Condensed Consolidated Statements of Operations.
NOTE
3 – NOTES PAYABLE
Notes
payable-in default
Notes
payable includes principal and accrued interest and consists of the following at September 30, 2017 and June 30, 2017:
|
|
|
September
30,
2017
|
|
June
30,
2017
|
(a)
|
Convertible
notes-in default
|
|
$
|
207,481
|
|
|
$
|
205,116
|
|
(b)
|
Notes
payable-in default
|
|
|
374,576
|
|
|
|
370,207
|
|
|
Total
notes-third parties
|
|
$
|
582,057
|
|
|
$
|
575,323
|
|
(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, 2017, convertible notes totaled $205,116. During the period ended September 30, 2017, interest of $2,365 was added
to principal leaving a balance owed of $207,481 at September 30, 2017. At September 30, 2017, $170,506 of the convertible notes
were in default, and convertible at a conversion price of $0.30 per share into 568,354 shares of the Company’s common stock.
The balance of $36,975 is due on demand and convertible at a conversion price of $0.08 per share into 462,181 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, 2017, the notes totaled $370,207. During the period ended September 30,
2017, interest of $4,369 was added to principal, leaving a balance owed of $374,576 at September 30, 2017. At September 30, 2017,
$338,293 of notes are secured by the Company’s intellectual property and $36,283 of notes are unsecured.
Notes
payable-related party
Notes
payable-related party includes principal and accrued interest and consists of the following at September 30, 2017 and June 30,
2017:
|
|
|
September
30, 2017
|
|
June
30,
2017
|
(c)
|
Convertible
notes-The Matthews Group
|
|
$
|
1,263,903
|
|
|
$
|
1
,236,943
|
|
(d)
|
Notes
payable-The Matthews Group
|
|
|
922,104
|
|
|
|
805,195
|
|
(e)
|
Convertible
notes-other related-in default
|
|
|
255,228
|
|
|
|
251,728
|
|
|
Total
notes-related party
|
|
$
|
2,441,235
|
|
|
$
|
2,293,866
|
|
(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 8) 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, 2017, convertible notes due to The Matthews Group was $1,236,943.
During the period ended September 30, 2017, interest of $26,960 was added to principal leaving a balance owed of $1,263,903 at
September 30, 2017. At September 30, 2017, $1,263,903 of the notes are convertible at a conversion price of $0.08 per share into
15,798,789 shares of the Company’s common stock.
(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 8) dated September 30, 2015. At June 30, 2017, notes payable totaled $805,195.
During the period ended September 30, 2017, $97,042 of notes payable were issued and interest of $19,867 was added to principal
leaving a balance due of $922,104 at September 30, 2017.
(e)
The notes are due to a current and a former director, are unsecured, convertible into common stock at per share amounts ranging
from $0.08 to $0.30, and bear interest at rates ranging from 8% to 10% per annum. At June 30, 2017, convertible notes due other
related parties totaled $251,728. During the period ended September 30, 2017, interest of $3,500 was added to principal leaving
a balance owed of 255,228 at September 30, 2017. At September 30, 2017, $190,374 of the notes are convertible at a conversion
price of $0.30 per share into 634,581 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 $41,349 of the notes are convertible at
a conversion price of $0.08 per share into 516,863 shares of the Company’s common stock.
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 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.
At June 30, 2017, the total derivative liabilities were $728,000. During the three months ended September 30, 2017, the Company
recorded a change in the fair value of the derivative liabilities of $463,000. At September 30, 2017, total derivative liabilities
were $265,000. 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:
|
|
September
30,
2017
|
|
June
30,
2017
|
Conversion feature:
|
|
|
|
|
|
|
|
|
Risk-free
interest rate
|
|
|
1.31
|
%
|
|
|
1.5
|
%
|
Expected
volatility
|
|
|
81
|
%
|
|
|
179
|
%
|
Expected
life (in years)
|
|
|
1
year
|
|
|
|
1
year
|
|
Expected
dividend yield
|
|
|
—
|
|
|
|
—
|
|
Fair Value:
|
|
|
|
|
|
|
|
|
Conversion
feature
|
|
$
|
265,000
|
|
|
$
|
728,000
|
|
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 both September 30, 2017 and June 30, 2017, 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 Condensed Consolidated Balance Sheets.
NOTE
6 – STOCK OPTIONS
Stock
Options
A
summary of stock options for the three months ended September 30, 2017 is as follows:
|
|
Number
of
|
|
Weighted
- Average
|
|
|
Shares
|
|
Exercise
Price
|
Outstanding
at June 30, 2017
|
|
|
2,500,000
|
|
|
$
|
0.08
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
Outstanding
at September 30, 2017
|
|
|
2,500,000
|
|
|
$
|
0.08
|
|
Exercisable
at September 30, 2017
|
|
|
2,500,000
|
|
|
$
|
0.08
|
|
At
September 30, 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 three months ended September 30, 2017 and the Company
recognized no stock-based compensation expense related to stock options during the three months ended September 30, 2017 and 2016,
respectively. As of September 30, 2017, there was no remaining unrecognized compensation costs related to stock options and no
intrinsic value.
Additional
information regarding options outstanding as of September 30, 2017 is as follows:
Options
Outstanding at
September 30, 2017
|
|
Options
Exercisable at
September 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
|
|
|
|
2.39
|
|
|
$
|
0.08
|
|
|
|
2,500,000
|
|
|
$
|
0.08
|
|
|
|
|
|
|
2,500,000
|
|
|
|
|
|
|
|
|
|
|
|
2,500,000
|
|
|
|
|
|
The
weighted-average remaining contractual life of stock options outstanding and exercisable at September 30, 2017 is 2.39 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 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 from June 1, 2017 to July 31, 2018 from the barcode technology operations. During the
three months ended September 30, 2017 and 2016, the Company recorded management fee revenue related to this agreement of $80,252
and $22,900, 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 three months ended September 30, 2017 and 2016, cash flow loans of $97,042 and $114,987, respectively, were
made to the Company at 10% interest per annum and due on demand. At September 30, 2017, cash flow loans of $922,104 are due to
The Matthews Group (see Note 3).
Advances
from Related Parties
As
of September 30, 2017 and June 30, 2017, $100,687 and $96,100 of advances due to Ms. Van Tran have been presented as accounts
payable, related party on the accompanying Condensed Consolidated Balance Sheets, respectively. 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 three months ended September 30, 2017 and 2016, rental payments
to Ms. Van Tran totaled $12,600.
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 September 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 September 30, 2017, the Company had not achieved an annual pre-tax earnings in excess of $3,000,000.