VERITEC,
INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
Fiscal
Years Ended June 30,
|
|
|
|
2019
|
|
2018
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(849,403
|
)
|
|
$
|
(18,210
|
)
|
|
Adjustments
to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
—
|
|
|
|
16,042
|
|
|
Change
in fair value of derivative liabilities
|
|
|
—
|
|
|
|
(603,000
|
)
|
|
Interest
accrued on notes payable
|
|
|
302,332
|
|
|
|
128,359
|
|
|
Stock-based
compensation
|
|
|
11,215
|
|
|
|
—
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(2,046
|
)
|
|
|
1,068
|
|
|
Prepaid
expenses
|
|
|
(63
|
)
|
|
|
(3,343
|
)
|
|
Deferred
revenues
|
|
|
(30,000
|
)
|
|
|
(42,492
|
)
|
|
Customer
deposits
|
|
|
68,251
|
|
|
|
—
|
|
|
Accounts
payable
|
|
|
45,507
|
|
|
|
23,251
|
|
|
Accounts
payable, related party
|
|
|
4,250
|
|
|
|
—
|
|
|
Accrued
expenses
|
|
|
(144
|
)
|
|
|
(8,594
|
)
|
|
Net
cash used in operating activities
|
|
|
(450,101
|
)
|
|
|
(506,919
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Proceeds
from notes payable
|
|
|
25,000
|
|
|
|
—
|
|
|
Proceeds
from notes payable-related party
|
|
|
377,127
|
|
|
|
599,312
|
|
|
Net
cash provided by financing activities
|
|
|
402,127
|
|
|
|
599,312
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
INCREASE (DECREASE) IN CASH
|
|
|
(47,974
|
)
|
|
|
92,393
|
|
|
CASH
AT BEGINNING OF PERIOD
|
|
|
139,086
|
|
|
|
46,693
|
|
|
CASH
AT END OF PERIOD
|
|
$
|
91,112
|
|
|
$
|
139,086
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
—
|
|
|
$
|
125,000
|
|
|
|
|
|
|
|
|
|
|
|
|
NON
CASH INVESTING AND FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Reclassification
of embedded conversion option derivative to additional paid-in capital
|
|
$
|
—
|
|
|
$
|
125,000
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes.
|
VERITEC,
INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE FISCAL YEARS ENDED JUNE 30, 2019 AND 2018
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
is primarily engaged in the development, sales, and licensing of products and providing services related to its mobile banking
solutions.
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. Veritec 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. Veritec has had agreements with various banks in the past andis currently seeking
a bank to sponsor its Prepaid Card programs.
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries Veritec Financial
Systems, Inc., Tangible Payment Systems, Inc., and Public Bell, Inc. (collectively the “Company”). 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. 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. Actual results could differ from those estimates.
Cash
and cash equivalents
Investments
with original maturities of three months or less are considered to be cash equivalents.
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. Based on management’s
assessment, no allowance for doubtful accounts was considered necessary at June 30, 2019, or 2018.
Revenue
Recognition
Revenues for the Company are classified into
management fee revenue and mobile banking technology.
Prior to July 1, 2018, the Company
recognized its revenue in accordance with Accounting Standards Codification (ASC) 605 Revenue Recognition , upon the delivery
of its services or products when: (1) delivery had occurred or services rendered; (2) persuasive evidence of an arrangement existed;
(3) there are no continuing obligations to the customer; and (4) the collection of related accounts receivable was probable.
Effective July 1, 2018, the Company adopted
the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update (“ASU”) No. 2014-09,
Revenue from Contracts with Customers (Topic 606) (“ASC 606”) which superseded previous revenue recognition
guidance. The underlying principle of ASC 606 is to recognize revenue to depict the transfer of goods or services to customers
at the amount expected to be collected. ASC 606 creates a five-step model that requires entities to exercise judgment when considering
the terms of contracts, which includes (1) identifying the contracts or agreements with a customer, (2) identifying the Company’s
performance obligations in the contract or agreement, (3) determining the transaction price, (4) allocating the transaction price
to the separate performance obligations, and (5) recognizing revenue as each performance obligation is satisfied. The Company only
applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to
in exchange for the services it transfers to its clients. The Company has concluded that the new guidance did not require any significant
change to its revenue recognition processes and the implementation of ASC 606 did not have a material impact on the Company’s
financial statements.
Mobile
Banking Technology 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.
The
Company has 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.
Other
Revenue, Management Fee - Related Party
On September 30, 2015, the Company sold all of its assets of its Barcode Technology, which was comprised solely
of its intellectual property, to The Matthews Group (a related party, see Note 9). The Company subsequently entered into a management
services agreement with The Matthews Group to manage all facets of the barcode technology operations through June 30, 2019. The
Company earned a fee of 20% of all revenues billed from the barcode technology operations up to May 31, 2017, and now earns a fee
of 35% of all revenues billed up to June 30, 2020. The Company recognizes management fee revenue as services are performed.
Disaggregation
of Net Sales
The
following table shows the Company’s disaggregated net sales by product type:
|
|
|
Fiscal
years ended June 30,
|
|
|
|
2019
|
|
2018
|
|
Mobile
banking technology revenue
|
|
$
|
120,009
|
|
|
$
|
121,901
|
|
|
Other
revenue, management fee - related party
|
|
|
186,520
|
|
|
|
376,580
|
|
|
Total
revenue
|
|
$
|
306,529
|
|
|
$
|
498,481
|
|
The
following table shows the Company’s disaggregated net sales by customer type:
|
|
|
Fiscal
years ended June 30,
|
|
|
|
2019
|
|
|
|
Real
Estate
|
|
$
|
186,520
|
|
|
$
|
376,580
|
|
|
Medical
|
|
|
62,363
|
|
|
|
54,824
|
|
|
Associations
|
|
|
30,000
|
|
|
|
42,492
|
|
|
Education
|
|
|
12,000
|
|
|
|
12,000
|
|
|
Other
|
|
|
15,646
|
|
|
|
12,585
|
|
|
Total
revenue
|
|
$
|
306,529
|
|
|
$
|
498,481
|
|
During
the years ended June 30, 2019 and 2018, all of the Company’s revenues were earned in the United States of America.
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.
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.
For
the years ended June 30, 2019 and 2018, 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, 2019 and 2018, 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,
|
|
|
|
2019
|
|
2018
|
|
Series
H Preferred Stock
|
|
|
10,000
|
|
|
|
10,000
|
|
|
Convertible
Notes Payable
|
|
|
20,874,054
|
|
|
|
19,337,127
|
|
|
Options
|
|
|
3,650,000
|
|
|
|
2,500,000
|
|
|
Total
|
|
|
24,534,054
|
|
|
|
21,847,127
|
|
Stock-Based
Compensation
The
Company periodically issues stock options and warrants to employees and non-employees in non-capital raising transactions, for
services and for financing costs. The Company accounts for share-based payments under the guidance as set forth in the Share-Based
Payment Topic of the FASB Accounting Standards Codification (“ASC”), which requires the measurement and recognition
of compensation expense for all share-based payment awards made to employees, officers, directors, and consultants, including
employee stock options, based on estimated fair values. The Company estimates the fair value of share-based payment awards to
employees and directors on the date of grant using a Black-Scholes-Merton option-pricing model, and the value of the portion of
the award that is ultimately expected to vest is recognized as expense over the required service period in the Company’s
statements of operations. The Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance
with the authoritative guidance whereas the value of the stock compensation is based upon the measurement date as determined at
either a) the date at which a performance commitment is reached, or b) the date at which the necessary performance to earn the
equity instruments is complete. Stock-based compensation is based on awards ultimately expected to vest and is reduced for estimated
forfeitures. Forfeitures are estimated at the time of grant and revised, as necessary, in subsequent periods if actual forfeitures
differ from those estimates.
Fair
Value of Financial Instruments
The
Company determines the fair value of its assets and liabilities based on the exchange price in U.S. dollars that would be received
for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability
in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value
maximize the use of observable inputs and minimize the use of unobservable inputs. The Company uses a fair value hierarchy with
three levels of inputs, of which the first two are considered observable and the last unobservable, to measure fair value:
|
|
•
|
Level 1 —
Quoted prices in active markets for identical assets or liabilities.
|
|
|
•
|
Level 2 —
Inputs, other than Level 1, that are observable, either directly or indirectly, such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable
market data for substantially the full term of the assets or liabilities.
|
|
|
•
|
Level 3 —
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets
or liabilities.
|
The
carrying amounts of financial instruments such as cash, accounts receivable, and accounts payable and accrued liabilities, approximate
the related fair values due to the short-term maturities of these instruments.
Concentrations
During the year ended June 30, 2019 and 2018,
the Company had one customer, a related party, that represented 61% and 76% of our revenues, respectively. No other customer represented
more than 10% of our revenues.
Segments
The
Company operates in one segment, the mobile financial banking industry. In accordance with the “Segment Reporting”
Topic of the ASC, the Company’s chief operating decision maker has been identified as the Chief Executive Officer and President,
who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. Existing
guidance, which is based on a management approach to segment reporting, establishes requirements to report selected segment information
quarterly and to report annually entity-wide disclosures about products and services, major customers, and the countries in which
the entity holds material assets and reports revenue. All material operating units qualify for aggregation under “Segment
Reporting” due to their similar customer base and similarities in: economic characteristics; nature of products and services;
and procurement, manufacturing and distribution processes. Since the Company operates in one segment, all financial information
required by “Segment Reporting” can be found in the accompanying consolidated financial statements
Recently
Issued Accounting Standards
In
February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02, Leases,
which was subsequently amended in 2018 by ASU 2018-10, ASU 2018-11 and ASU 2018-20 (collectively, Topic 842). Topic 842 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.
Topic 842 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. Topic 842 allows for a cumulative-effect adjustment in the period the new lease standard is adopted and will not require
restatement of prior periods. The Company plans to adopt ASU 2018-07 on July 1, 2019, , though the adoption is expected to have
no impact on the Company’s financial statements and related disclosures as the Company does not have leases with terms longer
than 12 months.
In
June 2018, the FASB issued ASU No. 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to nonemployee
share-based payment accounting. This ASU simplifies the accounting and reporting for share-based payments issued to nonemployees
by expanding the scope of ASC 718, Compensation – Stock Compensation , which currently only includes share-based compensation
to employees, to also include share-based payments to nonemployees for goods and services. The standard is effective for public
companies for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption
is permitted, but no earlier than a company’s adoption date of ASC 606. The Company plans to adopt ASU 2018-07 on July
1, 2019. The adoption of ASU 2018-07 is not expected to have an impact on the Company’s financial statements and related
disclosures.
Other
recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified
Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact
on the Company’s present or future consolidated financial statements.
NOTE
2 - GOING CONCERN
The accompanying Consolidated Financial Statements
have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and satisfaction
of liabilities in the normal course of business. During the year ended June 30, 2019, the Company recorded a loss of $849,403,
used cash in operating activities of $450,101, and at June 30, 2019, the Company had a stockholders’ deficiency of $5,299,377.
In addition, as of June 30, 2019, the Company is delinquent in payment of $795,792 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. 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 2020 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 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, 2019 and 2018, 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 (“intangible”) which were amortized over a
three-year period. During the year ended June 30, 2018, the Company recorded $16,042 of amortization expense related to this intangible
and at June 30, 2018, the intangible was fully amortized. Accordingly, no further amortization expense was recorded related to
this intangible during the year ended June 30, 2019.
NOTE
4 – CONVERTIBLE NOTES AND NOTES PAYABLE
Convertible
notes and notes payable
Notes
payable includes principal and accrued interest and consists of the following at June 30, 2019 and June 30, 2018:
|
|
|
June
30,
2019
|
|
June
30,
2018
|
|
(a)
Convertible notes ($184,506 and $175,045 in default)
|
|
$
|
224,037
|
|
|
$
|
214,576
|
|
|
(b)
Notes payable (in default)
|
|
|
405,162
|
|
|
|
387,685
|
|
|
(c)
Notes payable
|
|
|
25,153
|
|
|
|
—
|
|
|
Total
notes-third parties
|
|
$
|
654,352
|
|
|
$
|
602,261
|
|
(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 $205,115. During the year ended June 30, 2018, interest of $9,461 was added to principal
leaving a balance owed of $214,576 at June 30, 2018. During the year ended June 30, 2019, interest of $9,461 was added to principal,
leaving a balance owed of $224,037 at June 30, 2019. At June 30, 2019, $184,506 of the convertible notes were in default, and
convertible at a conversion price of $0.30 per share into 615,021 shares of the Company’s common stock. Certain of the amounts
due are subject to a legal proceeding (see Note 9). The balance of $39,531 is due on demand and convertible at a conversion price
of $0.08 per share into 494,137 shares of the Company’s common stock.
(b)
The notes are either secured by the Company’s intellectual property or unsecured and bear interest ranging from 6.5% to
10% per annum, were due in 2012, and are in default.
At
June 30, 2017, the notes totaled $370,208. During the year ended June 30, 2018, interest of $17,477 was added to principal, leaving
a balance owed of $387,685 at June 30, 2018. During the year ended June 30, 2019, interest of $17,477 was added to principal leaving
a balance owed of $405,162 at June 30, 2019. At June 30, 2019, $365,379 of notes are secured by the Company’s intellectual
property and $39,783 of notes are unsecured.
(c)
The notes are unsecured and bear interest of 4% per annum and due on March 17, 2020.
On
March 18, 2019 and June 6, 2019, the Company entered into notes payable for $10,000 and $15,000, respectively. During the period,
interest of $153 was added to principal, leaving a balance owed of $25,153 at June 30, 2019.
Convertible
notes and notes payable-related parties
Notes
payable-related parties includes principal and accrued interest and consists of the following at June 30, 2019 and June 30, 2018:
|
|
|
June
30,
2019
|
|
June
30,
2018
|
|
(a)
Convertible notes-The Matthews Group
|
|
$
|
1,452,621
|
|
|
$
|
1,344,782
|
|
|
(b)
Notes payable-The Matthews Group
|
|
|
1,914,618
|
|
|
|
1,384,088
|
|
|
(c)
Convertible notes-other related parties ($206,124 and 197,124 in default)
|
|
|
279,728
|
|
|
|
265,729
|
|
|
Total
notes-related parties
|
|
$
|
3,646,967
|
|
|
$
|
2,994,599
|
|
(a)
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 is a related party (see Note 8) and 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 totaled $1,236,943. During
the year ended June 30, 2018, interest of $107,839 was added to principal leaving a balance payable of $1,344,782 at June 30,
2018. During the year ended June 30, 2019, interest of $107,839 was added to principal leaving a balance payable of $1,452,621
at June 30, 2019. At June 30, 2019, the notes are convertible at a conversion price of $0.08 per share into 18,157,765 shares
of the Company’s common stock.
(b)
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 due to The Matthews
Group totaled $805,195. During the year ended June 30, 2018, $599,312 of notes payable were issued, interest of $104,581 was added
to principal, and an interest payment of $125,000 was made, leaving a balance owed of $1,384,088 at June 30, 2018. During the
year ended June 30, 2019, $377,127 of notes payable were issued and interest of $153,403 was added to principal, leaving a balance
owed of $1,914,618 at June 30, 2019.
(c)
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 to other related parties totaled $251,728. During the year ended June 30, 2018, interest
of $14,001 was added to principal leaving a balance owed of $265,729 at June 30, 2018. During the year ended June 30, 2019, interest
of $13,999 was added to principal leaving a balance owed of $279,728 at June 30, 2019. At June 30, 2019, $206,124 of the notes
were due in 2010 and are in default, and the balance of $73,604 is due on demand. At June 30, 2019, $206,124 of the notes are
convertible at a conversion price of $0.30 per share into 687,081 shares of the Company’s common stock, and $73,604 of the
notes are convertible at a conversion price of $0.08 per share into 920,050 shares of the Company’s common stock.
NOTE
5 - 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, 2019 and 2018, there were 1,000
shares of Series H convertible preferred stock issued and outstanding.
Common
Stock
On
February 2, 2018, the Company’s Board of Directors voted to increase the Company’s authorized common shares from 50,000,000
shares to 150,000,000 common shares. The Company filed the required documentation with the State of Nevada in April 2018, with
an effective date of April 18, 2018.
Common
Stock to be Issued
At
June 30, 2019 and 2018, 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 financial statements.
NOTE
6 – STOCK OPTIONS
A
summary of stock options as of June 30, 2019 and for the two years then ended is as follows:
|
|
|
Number
of Shares
|
|
Weighted
- Average Exercise Price
|
|
Outstanding
at June 30, 2017
|
|
|
2,500,000
|
|
|
$
|
0.08
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
Forfeited
|
|
|
—
|
|
|
$
|
0.08
|
|
|
Outstanding
at June 30, 2018
|
|
|
2,500,000
|
|
|
$
|
0.08
|
|
|
Granted
|
|
|
1,150,000
|
|
|
|
0.03
|
|
|
Forfeited
|
|
|
—
|
|
|
$
|
—
|
|
|
Outstanding
at June 30, 2019
|
|
|
3,650,000
|
|
|
$
|
0.06
|
|
|
Exercisable
at June 30, 2019
|
|
|
3,075,000
|
|
|
$
|
0.07
|
|
In
December 2018, the Company granted to its directors and employees, stock options to purchase an aggregate of 1,150,000 shares
of Common Stock. The fair value of the stock options granted was determined to be $21,285 and is being amortized over the vesting
period of 12 months. During the year ended June 30, 2019, the Company recorded stock-based compensation expense of $11,215. As
of June 30, 2019, the Company has outstanding unvested options with future compensation costs of $10,070, which will be recorded
as compensation cost as the options vest over their remaining average vesting period of six months. The Company did not grant
stock options during the prior year ended June 30, 2018.
The
outstanding and exercisable stock options had an intrinsic value of $11,500 and $5,750, respectively, at June 30, 2019.
The
fair value of each option on the date of grant was estimated using the Black-Scholes option-pricing model with the following weighted-average
assumptions:
|
|
|
2019
|
|
Exercise Price
|
|
$
|
0.03
|
|
|
Stock Price
|
|
$
|
0.03
|
|
|
Risk-free interest
rate
|
|
|
2.63
|
%
|
|
Expected volatility
|
|
|
121
|
%
|
|
Expected life (in years)
|
|
|
2.0
|
|
|
Expected dividend yield
|
|
|
0
|
%
|
Additional
information regarding options outstanding as of June 30, 2019, is as follows:
|
Options
Outstanding at
June
30, 2019
|
|
Options
Exercisable at
June
30, 2019
|
|
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
|
|
$
|
0.03
|
|
|
|
1,150,000
|
|
|
|
5.48
|
|
|
$
|
0.03
|
|
|
|
575,000
|
|
|
$
|
0.03
|
|
|
$
|
0.08
|
|
|
|
2,500,000
|
|
|
|
0.61
|
|
|
$
|
0.08
|
|
|
|
2,500,000
|
|
|
$
|
0.08
|
|
|
|
|
|
|
|
3,650,000
|
|
|
|
|
|
|
|
|
|
|
|
3,075,000
|
|
|
|
|
|
NOTE
7 - INCOME TAXES
For
the year ended June 30, 2019, net loss was $849,403, as compared to a net loss of $18,210 for the year ended June 30, 2018. For
the years ended June 30, 2019 and 2018, no provision for income taxes was recorded. We made no provision for income taxes due
to our utilization of federal net operating loss carryforwards 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,
|
|
|
|
2019
|
|
2018
|
|
Federal
statutory tax rate
|
|
|
21
|
%
|
|
|
28
|
%
|
|
State
tax, net of federal benefit
|
|
|
6
|
%
|
|
|
6
|
%
|
|
Total tax rate
|
|
|
27
|
%
|
|
|
34
|
%
|
|
Allowance
|
|
|
(27
|
)%
|
|
|
(34
|
)%
|
|
Effective
tax rate
|
|
|
—
|
%
|
|
|
—
|
%
|
The
following is a summary of the deferred tax assets:
|
|
|
Year
Ended June 30,
|
|
|
|
2019
|
|
2018
|
|
Net
operating loss carryforwards
|
|
$
|
3,403,000
|
|
|
$
|
2,580,000
|
|
|
Deferred
tax assets before valuation allowance
|
|
|
3,403,000
|
|
|
|
2,580,000
|
|
|
Valuation
allowance
|
|
|
(3,403,000
|
)
|
|
|
(2,580,000
|
)
|
|
Net
deferred tax asset
|
|
$
|
—
|
|
|
$
|
—
|
|
The
Company has provided a valuation allowance on the deferred tax assets at June 30, 2019 and 2018 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, 2019, was an increase of $823,000.
Veritec
has net operating loss carryforwards of approximately $12,602,000 million for federal purposes available to offset future taxable
income that expires in varying amounts through 2036. The ability to utilize the net operating loss carryforwards 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 carryforward 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, 2019 and 2018, 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, 2019
and 2018, the Company has no accrued interest or penalties related to uncertain tax positions.
NOTE
8 – RELATED PARTY TRANSACTIONS
The
Matthews Group is owned 50% by Ms. 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
The
Company’s Barcode Technology was 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. 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 then
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 June 30, 2019. 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 of the services provided by the Company to The Matthews Group, the Company earned a fee of 20% of all revenues up
to May 31, 2017, and 35% of all revenues up to June 30, 2020, from the barcode technology operations. During the year ended June
30, 2019 and 2018, the Company recorded management fee revenue related to this agreement of $186,520 and $376,580, respectively.
Additionally,
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, 2019 and 2018, cash flow loans of $377,127 and $599,312, respectively, were made to the Company at 10% interest per annum
and due on demand. At June 30, 2019, cash flow loans of $1,914,618 are due to The Matthews Group (see Note 4).
Advances
from Related Parties
From
time to time, Ms. Tran, the Company’s CEO/Executive Chair, provides advances to finance the Company’s working capital
requirements. As of June 30, 2019 and 2018, total advances to Ms. Tran amounted to $100,360 and $96,110, respectively, and 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, the Company’s CEO/Executive Chair. For both the years ended June 30,
2019 and 2018, lease payments to Ms. Tran totaled $51,000.
NOTE
9 – LEGAL PROCEEDINGS
On
or about November 13, 2017, David A. Badhwa and Denise a Badhwa (collectively “Plaintiffs”) filed a lawsuit in district
court in Hennepin County, Minnesota asserting that the Company breached the terms of a promissory note. Plaintiffs sought repayment
on the principal of the promissory note, in the amount of $100,000, $10,000 of which Plaintiffs contend Veritec previously paid,
plus interest, collection costs and attorney’s fees. As of May 15, 2018, the date of the last communication on the amount
of recovery from Plaintiffs, the Plaintiffs sought an award or settlement in the amount of $162,990. As of June 30, 2019, the
Company had recorded a promissory note payable of $166,921 related to this proceeding.
On
July 10, 2019, the Company and Plaintiffs entered into a Confidential Settlement Agreement and Mutual Release, whereas, both the
Company and the Plaintiffs agreed to generally discharge and forever release each other from future claims, to pay their own legal
fees, and the promissory note payable to the Plaintiffs was discharged. During the three months ended September 30, 2019, the
Company recorded a gain on settlement and extinguishment of the promissory note payable of $166,921.
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. As of June 30, 2019, the 500,000 shares have not been
relinquished. When the Company receives the shares, it will record a cancellation of shares.
NOTE
10 – COMMITMENTS AND CONTINGENCIES
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, 2019, the Company had not achieved annual pre-tax earnings in excess of $3,000,000.
On
December 5, 2008, the Company entered into an employment agreement with Van Thuy Tran, its Chief Executive Officer, providing
for an annual base salary of $150,000 and customary medical and other benefits. The agreement may be terminated by either party
upon 30 days’ notice. In the event the Company terminates the agreement without cause, Ms. Tran will be entitled to $1,000,000
payable upon termination, and she will be entitled to severance equal to 12 months compensation and benefits. The Company has
also agreed to indemnify Ms. Tran against any liability or damages incurred within the scope of her employment. During the year
ended June 30, 2019 and 2018, salaries paid to Van Thuy Tran under this agreement totated $150,000 and $150,000.