Attached files
| file | filename |
|---|---|
| EX-32.1 - EXHIBIT 32.1 - VERITEC INC | c92764exv32w1.htm |
| EX-31.1 - EXHIBIT 31.1 - VERITEC INC | c92764exv31w1.htm |
| EX-31.2 - EXHIBIT 31.2 - VERITEC INC | c92764exv31w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM l0-Q
(Mark One)
| þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
for the quarterly period ended SEPTEMBER 30, 2009
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE AC T OF 1934 |
for the transition period from to .
Commission File Number. 0-15113
VERITEC, INC.
(Exact name of Registrant as Specified in its Charter)
| Nevada | 95-3954373 | |
| (State or Other Jurisdiction of Incorporation or Organization) |
(IRS Employer Identification No.) |
|
| 2445 Winnetka Avenue N. Golden Valley, MN | 55427 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (763) 253-2670
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule l2b-2 of the
Exchange Act. (Check one):
| Large Accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ | |||
| (Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
Indicate by check mark whether the registrant has filed all documents and reports required to
be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court. Yes þ No o
As of September 30, 2009, there were 16,315,088 shares of the issuer’s common stock
outstanding.
VERITEC, INC.
FORM 10-Q
FOR THE FISCAL QUARTER ENDED SEPTEMBER 30, 2009
FOR THE FISCAL QUARTER ENDED SEPTEMBER 30, 2009
TABLE OF CONTENTS
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| Exhibit 31.1 | ||||||||
| Exhibit 31.2 | ||||||||
| Exhibit 32.1 | ||||||||
Table of Contents
PART I
| ITEM 1 | FINANCIAL STATEMENTS |
VERITEC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, | June 30, | |||||||
| 2009 | 2009 | |||||||
| (Unaudited) | ||||||||
ASSETS |
||||||||
Current Assets: |
||||||||
Cash |
$ | 53,384 | $ | 50,019 | ||||
Accounts receivable, net of allowance of $8,400 |
64,273 | 28,376 | ||||||
Inventories |
3,829 | 6,217 | ||||||
Prepaid expenses |
16,656 | 23,281 | ||||||
Employee advances |
6,900 | 8,500 | ||||||
Total Current Assets |
145,042 | 116,393 | ||||||
Property and Equipment, net |
80,726 | 93,292 | ||||||
Other assets |
43,756 | 43,756 | ||||||
Total Assets |
$ | 269,524 | $ | 253,441 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) |
||||||||
Current Liabilities: |
||||||||
Notes payable |
$ | 1,360,027 | $ | 20,039 | ||||
Accounts payable |
304,955 | 187,368 | ||||||
Accrued expenses |
256,884 | 353,161 | ||||||
Total Current Liabilities |
1,921,866 | 560,568 | ||||||
Notes Payable |
100,034 | 885,673 | ||||||
Commitments and Contingencies |
||||||||
Stockholders’ Equity: |
||||||||
Convertible preferred stock, par value $1.00;
authorized 10,000,000 shares, 276,000 shares of
Series H authorized, 1,000 shares issued |
1,000 | 1,000 | ||||||
Common stock, par value $.01; authorized
20,000,000 shares, 16,315,088 and 16,165,088
shares issued |
163,151 | 161,651 | ||||||
Additional paid-in capital |
14,092,430 | 13,943,046 | ||||||
Accumulated deficit |
(16,008,957 | ) | (15,298,497 | ) | ||||
Total Stockholders’ Deficit |
(1,752,376 | ) | (1,192,800 | ) | ||||
Total Liabilities and Stockholders’ Equity (Deficit) |
$ | 269,524 | $ | 253,441 | ||||
See notes to condensed consolidated financial statements
Page 3 of 13
Table of Contents
VERITEC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three months ended September 30, | ||||||||
| 2009 | 2008 | |||||||
License and other revenue |
$ | 200,641 | $ | 432,532 | ||||
Cost of Sales |
159,459 | 63,596 | ||||||
Gross Profit |
41,182 | 368,936 | ||||||
Operating Expenses: |
||||||||
Selling, general and administrative |
536,411 | 321,376 | ||||||
Research and development |
188,005 | 99,095 | ||||||
Total Operating Expenses |
724,416 | 420,471 | ||||||
Loss from Operations |
(683,234 | ) | (51,535 | ) | ||||
Other Income: |
||||||||
Interest income |
29 | 1,061 | ||||||
Interest expense |
(27,255 | ) | — | |||||
Total Other Income |
(27,226 | ) | 1,061 | |||||
Net Loss |
$ | (710,460 | ) | $ | (50,474 | ) | ||
Loss Per Common Share |
||||||||
Basic and Diluted |
$ | (0.05 | ) | $ | (0.00 | ) | ||
See notes to condensed consolidated financial statements
Page 4 of 13
Table of Contents
VERITEC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Three months ended September 30, | ||||||||
| 2009 | 2008 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Net loss |
$ | (710,460 | ) | $ | (50,474 | ) | ||
Adjustments to reconcile net loss to net cash used by operating activities: |
||||||||
Depreciation |
12,566 | 9,721 | ||||||
Amortization of debt issuance cost |
771 | — | ||||||
Amortization of discount on notes payable |
3,306 | — | ||||||
Stock compensation |
113,384 | 1,171 | ||||||
Interest added to notes payable |
23,772 | — | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(35,897 | ) | (57,911 | ) | ||||
Employee advances |
1,600 | — | ||||||
Inventories |
2,388 | 14,676 | ||||||
Prepaid expenses |
6,625 | — | ||||||
Accounts payables and accrued expenses |
58,810 | 62,917 | ||||||
Net cash used by operating activities |
(523,135 | ) | (19,900 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Purchase of property and equipment |
— | (906 | ) | |||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Proceeds from notes payable |
591,500 | — | ||||||
Payments on notes payable |
(65,000 | ) | — | |||||
Net cash provided by financing activities |
526,500 | — | ||||||
NET INCREASE (DECREASE) IN CASH |
3,365 | (20,806 | ) | |||||
CASH AT BEGINNING OF PERIOD |
50,019 | 334,702 | ||||||
CASH AT END OF PERIOD |
$ | 53,384 | $ | 313,896 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION |
||||||||
Cash paid for interest |
$ | 177 | $ | — | ||||
NONCASH ACTIVITIES |
||||||||
Issuance of common stock for accrued expenses |
$ | 37,500 | $ | — | ||||
Debt issuance cost netted to proceeds from note payable |
9,250 | — | ||||||
See notes to condensed consolidated financial statements
Page 5 of 13
Table of Contents
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A. THE COMPANY
References to the “Company” in this Form 10-Q refer to Veritec, Inc. (“Veritec”) and its
wholly owned subsidiaries VCode Holdings, Inc. (“VCode”) and Veritec Financial Systems, Inc.
(“VTFS”).
B. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared in
accordance with United States of America generally accepted accounting principles (GAAP) for
interim financial information and with the instructions to Form 10-Q. Accordingly, the condensed
consolidated financial statements do not include all of the information and footnotes required for
complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating results for the three
month period ended September 30, 2009, are not necessarily indicative of the results that may be
expected for the year ended June 30, 2010. For further information, refer to the Consolidated
Financial Statements and footnotes thereto included in our Form 10-K as of and for the year ended
June 30, 2009. The Condensed Consolidated Balance Sheet as of June 30, 2009 was derived from the
audited consolidated financial statements as of such date, but does not include all of the
information and footnotes required by GAAP.
The accompanying condensed consolidated financial statements include the accounts of Veritec,
VCode, and VTFS. All inter-company transactions and balances were eliminated in consolidation.
C. NATURE OF BUSINESS
The Company is primarily engaged in the development, marketing, sales and licensing of
products and rendering of professional services related thereto in the following two fields of
technology: (1) proprietary two-dimensional matrix symbology (also commonly referred to as
“two-dimensional barcodes” or “2D barcodes”), and (2) mobile banking solutions.
In this Form 10-Q, the Company’s two-dimensional matrix symbology technology will hereafter be
referred to as the Company’s “Barcode Technology”, and the Company’s mobile banking technology will
hereafter be referred to as its “Mobile Banking Technology”.
The Company’s Barcode Technology was originally invented by the founders of Veritec under
United States patents 4,924,078, 5,331,176, 5,612,524 and 7,159,780. Our principal licensed
product to date that contains our VeriCode® Barcode Technology has been a product
identification system for identification and tracking of manufactured parts, components and
products. The VeriCode® symbol is a two-dimensional high data density machine-readable symbol that
can contain up to approximately 500 bytes of data.
The Company’s VSCode® Barcode Technology is a derivative of the
VeriCode® symbol with the ability to encrypt a greater amount of data by increasing data
density. The VSCode® is a data storage “container” that offers a high degree of
security and which can also be tailored to the application requirements of the user. The
VSCode® symbol can hold any form of binary information that can be digitized, including
numbers, letters, images, photos, graphics, and the minutia for biometric information, including
fingerprints and facial image data, to the extent of its data storage capacity, that are likewise
limited by the resolution of the marking and reading devices employed by the user.
VSCode® is ideal for secure identification documents (such as national identification
cards, drivers licenses, voter registration cards), financial cards, medical records and other high
security applications.
In its PhoneCodes™ product platform, Veritec developed software to send, store, display, and
read a VeriCode® Barcode Technology symbol on the LCD screen of a mobile phone. With the
electronic media that provide the ease of transferring information over the web, Veritec’s
PhoneCodes™ technology enables individuals and companies to receive or distribute gift
certificates, tickets, coupons, receipts, or engage in banking transactions using the
VeriCode® technology via wireless phone or PDA.
On January 12, 2009, Veritec formed VTFS, a Delaware corporation, to bring its Mobile Banking
Technology, products and related professional services to market. In May 2009 Veritec was
registered by Security First Bank in Visa’s Third Party Registration Program as a Cardholder
Independent Sales Organization and Third-Party Servicer. As a Cardholder Independent
Sales Organization, Veritec may 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 Security First Bank.
Page 6 of 13
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Our VeriSuite™ card enrollment system was released in July 2009. The VeriSuite™ system is a
user friendly and cost effective solution that gives governments and businesses the ability to
provide cardholders with an identity card containing Veritec’s VSCode® Barcode Technology. The
VeriSuite™ system provides secure Bio-ID Cards such as citizen identification, employee cards,
health benefit cards, border control cards, financial cards, and more.
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.
D. SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition:
The Company accounts for revenue recognition in accordance with SEC Staff Accounting Bulletin
(SAB) No. 101 “Revenue Recognition in Financial Statements” and related amendments. Revenues for
the Company are classified into the following three separate categories: license revenue (Barcode
Technology), hardware revenue, and identification card services revenue.
Revenues from licenses, hardware, and identification cards are recognized when the product is
shipped and collection is reasonably assured. The process typically begins for license and hardware
revenue with a customer purchase order detailing its hardware specifications so the Company can
import its software into the customer’s hardware. Once importation is completed, if the customer
only wishes to purchase a license, the Company typically transmits the software to the customer via
the Internet. Revenue is recognized at that point. If the customer requests both license and
hardware products, once the software is imported into the hardware and the process is complete, the
product is shipped and revenue is recognized at time of shipment. Once the software and/or
hardware are either shipped or transmitted, the customers do not have a right of refusal or return.
Under some conditions, the customers remit payment prior to the Company having completed
importation of the software. In these instances, the Company delays revenue recognition and
reflects the prepayments as customer deposits.
The process for identification cards begins when a customer requests, via the Internet, an
identification card. The card is reviewed for design and placement of the data, printed and
packaged for shipment. At the time the identification cards are shipped and collection is
reasonably assured, revenue is recognized.
Patent Costs:
The patent application costs are capitalized and, when approved, will be amortized over its
estimated useful life. If not approved, or if considered impaired, these costs will be written off
when deemed impaired.
E. NET LOSS PER COMMON SHARE
Basic net loss per common share is computed by dividing the loss available to common
stockholders by the weighted-average number of common shares outstanding. Diluted net loss per
common share, in addition to the weighted-average number of common shares outstanding determined
for basic net loss per common share, includes potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common stock.
The weighted average shares outstanding were 15,755,849 and 15,115,088 for the three months
ended September 30, 2009 and 2008, respectively. Potentially dilutive instruments include stock
options, warrants, preferred stock, convertible notes payable, and stock compensation (Note F and
G). For the three months ended September 30, 2009, unvested restricted shares (525,000 common
shares), stock options (819,249 common shares), warrants (275,000 common shares), convertible notes
payable (1,089,697 common shares), and preferred stock (10,000 common shares) were antidilutive
and, therefore, were not included in the computation of diluted net loss per common share. For the
three months ended September 30, 2008, stock options (296,749 common shares) and preferred stock
(10,000 common shares) were antidilutive and, therefore, were not included in the computation of
diluted net loss per common share.
Page 7 of 13
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F. NOTES PAYABLE
During the quarter ended September 30, 2009, the Company borrowed a total of $535,750, net of
repayment of $20,000 in the same quarter, with annual interest at 8%, as follows: (i) $485,750
consists of loans made to the Company by The Matthews Group, a related party that is owned and
controlled by Larry Johanns, a significant Company shareholder, and Van Tran, the Chairman of the
Board, consisting of a $1,500 note which is convertible into common stock at $0.33 per share, due
July 2010; a $100,000 unsecured note that is due on demand; and a $384,250 note that is secured by
a security interest in the Company’s intellectual property, and due in August 2010; and (ii) a
$50,000 note due to an unrelated party and convertible into common stock at $1.00 per share,
subject to board of directors approval, due in November 2009.
In October 2009, the Board of Directors approved the issuance of 70,000 shares of common stock upon
the conversion in full of a $70,000 note payable to an unrelated party.
Subsequent to the quarter ended September 30, 2009, the Company borrowed $200,000 from The Matthews
Group at 8% annual interest, maturing November 2010. The note is secured by all of the Company’s
intellectual property and is convertible into the Company’s common stock at the rate of one share
for every $0.25 loaned.
G. STOCK-BASED COMPENSATION
The Company has agreements with certain of its employees and independent contractor
consultants that provide grants of options to purchase the Company’s common stock.
The Company also has agreements with one employee and one consultant that provide for five
years of annual grants of options on each anniversary date. The option price is determined based
on the market price on the date of the grant for some of the employees and market price on the date
of grant for the others. The options vest one year from date of grant and expire five years after
vesting. As of September 30, 2009, the Company has commitments to the employee and consultant to
grant options to acquire 10,000 shares of the Company’s common stock for fiscal year 2011.
A summary of outstanding stock options is as follows:
| Number | ||||||||
| of | Weighted — Average | |||||||
| Shares | Exercise Price | |||||||
Outstanding at June 30, 2009 |
721,749 | $ | 0.49 | |||||
Granted |
97,500 | $ | 0.38 | |||||
Outstanding at September 30, 2009 |
819,249 | $ | 0.48 | |||||
The weighted-average remaining contractual life of stock options outstanding at September 30,
2009 is 4.6 years.
The weighted-average fair value of options granted for the three months ended September 30,
2009 and 2008 was $0.34 and $0.14, respectively. Stock-based compensation expense was $34,634 and
$1,171 during the three months ended September 30, 2009 and 2008, respectively. As of September
30, 2009, there was $41,227 of unrecognized compensation costs related to stock options. These
costs are expected to be recognized over the next four quarters.
On December 5, 2008, the Company’s Board of Directors granted Mr. Hattara 1,000,000 restricted
shares of the Company’s common stock and granted Mr. Thomas McPherson, the Company’s Vice
President, General Counsel and Secretary 50,000 restricted shares of the Company’s common stock.
The shares for both individuals were valued at the fair market price for December 5, 2008 of $0.30
per share. Of the 1,050,000 shares of common stock, 525,000 shares vested on June 5, 2009 and the
remainder vest on December 5, 2009. The total compensation expense for these arrangements was
$78,750 for the three months ended September 30, 2009.
In addition, 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.
Page 8 of 13
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In October 2009, the Company granted options to acquire 50,000 shares of the Company’s common
stock to two consultants.
The Company’s Board of Directors had authorized the Chief Executive Officer to issue up to
1,000,000 shares of the Company’s common stock in the form of options or stock bonuses to employees
and consultants. As of September 30, 2009, stock and stock options totaling 399,249 have been
committed and are outstanding under this authorization.
H. GOING CONCERN
The accompanying condensed financial statements have been prepared assuming the Company will
continue as a going concern. At September 30, 2009, the Company has $53,384 and ($1,776,824) of
cash and working capital deficit, respectively. The Company believes its cash and forecasted cash
flow from operations will not be sufficient to continue operations through fiscal 2010 without
continued external investment. The Company believes it will require additional funds to continue
its operations through fiscal 2010 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.
I. RECENTLY ISSUED ACCOUNTING STANDARD
In April 2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of Intangible
Assets (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful life of a recognized intangible asset
under SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). The intent of this FSP FAS
142-3 is to improve the consistency between the useful life of a recognized intangible asset under
SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under
SFAS No. 141R (revised 2007), Business Combinations, and other generally accepted accounting
principals. FSP FAS 142-3 is effective for financial statements issued for fiscal years beginning
after December 15, 2008, and interim periods within those fiscal years. The adoption of FSP FAS
142-3 did not to have a material impact on the Company’s financial position or results of
operations.
In June 2009, the FASB issued SFAS No. 168, The “FASB Accounting Standards Codification” and
the Hierarchy of Generally Accepted Accounting Principles. This standard replaces SFAS No. 162, The
Hierarchy of Generally Accepted Accounting Principles, and establishes only two levels of U.S.
generally accepted accounting principles (“GAAP”), authoritative and non-authoritative. The FASB
Accounting Standards Codification (the “Codification”) will become the source of authoritative,
nongovernmental GAAP, except for rules and interpretive releases of the Securities and Exchange
Commission (“SEC”), which are sources of authoritative GAAP for SEC registrants. All other
non-grandfathered, non-SEC accounting literature not included in the Codification will become
non-authoritative. This standard is effective for financial statements for interim or annual
reporting periods ending after September 15, 2009. As the Codification was not intended to change
or alter existing GAAP, it will not have any impact on the Company’s consolidated financial
statements.
J. SUBSEQUENT EVENTS
In October 2009, the Company’s board of directors approved a request from the Company’s President
and CEO, Jeffrey Hattara, to terminate 150,000 non-vested stock options that were previously
granted to him in order to make shares available to the Company for its future use. David Reiling,
a board member, resigned subsequent to the quarter ended September 30, 2009 and voluntarily
relinquished his non-issued 50,000 shares of restricted common stock granted to him.
In October 2009, the Company also signed a consulting agreement with an entity for a period of 12
months. The financial commitment under this consulting agreement is $4,000 and 41,667 restricted
shares of the Company’s common stock per month, with a total potential financial commitment over
the full 12 month term of $48,000 and 500,000 shares of the Company’s common stock. Either party
may terminate the consulting agreement at any time, without cause, upon written notice to the
other.
Management has evaluated subsequent events through November 16, 2009, the filing date of this
quarterly report on Form 10-Q.
Page 9 of 13
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| ITEM 2 | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Results of Operations — September 30, 2009 compared to September 30, 2008
We had a net loss of $710,460 for the three months ended September 30, 2009 compared to a net loss
of $50,474 for the three months ended September 30, 2008.
License and other revenues are derived from our product identification systems sold principally to
customers in the LCD monitor industry.
For the three months ended September 30, 2009, license and other revenue was $200,641 compared to
$432,532 for the three months ended September 30, 2008, a decrease of $231,891. The license and
other revenue decrease are attributable to the decline in demand for LCD screens. Revenues from the
LCD market remain unpredictable as they are generated when customers open new production facilities
or update production equipment; however, for now the Company continues to experience decline in
demand for product identification product licenses in the LCD industry. The decrease is a result
of various customers purchasing less than in the three months ended September 30, 2008.
Cost of Goods Sold
Cost of sales for the three months ended September 30, 2009, totaled $159,459 and for the three
months ended September 30, 2008, cost of sales were $63,596, an increase of $95,863. The increase
in cost of sales for the three months ended September 30, 2009 was the result of cost of
maintaining the Company’s data processing center for its mobile banking operations, which made up
88% of the total cost of sales compared to none in the quarter ended September 30, 2008. This
increase was however offset by a reduction in the cost of licenses sold during the quarter and
maintenance services, which decreased, by $44,243 over the three months ended September 30, 2008.
Operating Expenses
Research and development expense for the three months ended September 30, 2009 totaled $188,005
versus $99,095 for the three months ended September 30, 2008. The increase of $88,910 was
principally the result of increased engineering payroll expense and related employer taxes that
increased by $72,539 from the Company’s mobile banking operations, which was not operational during
the three month ended September 30, 2008. The remaining $16,370 increase was due to the
development of loyalty program for the mobile banking operations.
Sales and marketing expense for the three months ended September 30, 2009 were $48,931 compared to
$37,146 for the three months ended September 30, 2008, an increase of $11,785. For the three
months ended September 30, 2009, the Company had one direct sales staff, accounting for $27,585 of
cost increases compared to no sales staff for the same three month period ended September 30, 2008.
The Company, for the three months ended September 30, 2009, paid out commissions of $162 compared
to $13,033 for the three month period ended September 30, 2008.
General and administrative expenses for the three months ended September 30, 2009 were $487,480
compared to $284,230 for the three months ended September 30, 2008, an increase of $203,250 over
the three months ended September 30, 2008. The increase was mainly the result of increases in most
of the expenditures for the three months ended September 30, 2009 compared to the three months
ended September 30, 2008. Rent expense was higher by $11,500 due to the Company renting two
housing units for guests and leasing of additional office space for the three months ended
September 30, 2009. The Company saw increases of $44,450 in payroll expense, $112,213 in stock
compensation expense, $10,426 in employer payroll taxes, $10,261 in health insurance costs, and
$17,588 in public company fees, over the same three months ended September 30, 2008. The increased
payroll and stock compensation related mainly to compensation for officers who commenced their
employment in December 2008.
Other Income (Expense)
Interest income for the three months ended September 30, 2009 was $29 compared to $1,061 for the
three months ended September 30, 2008 a decrease of $1,032. The decrease was a result of the
Company’s need for cash to fund the operations, thus drawing down cash reserves and in doing so
earning less interest. Interest expense for the three months ended September 30, 2009 was $27,255
compared to $0 in the same period ended September 30, 2008. The increase was the result of
issuance of notes payable.
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Liquidity
At September 30, 2009, the Company has $53,384 and ($1,850,424) of cash and working capital
deficit, respectively. Subsequent to the quarter ended September 30, 2009, the Company borrowed
$200,000 from The Matthews Group at 8% annual interest, maturing November 2010. The note is
secured by all of the Company’s intellectual property and is convertible into the Company’s common
stock at the rate of one share for every $0.25 loaned.
The Company believes it will require additional funds to continue its operations through fiscal
2010 and continue to develop its existing and future projects by obtaining investment funds,
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.
Commitments and Contractual Obligations
The Company has one annual lease commitment of $50,400 for the corporate office building. The
office building is leased from the Company’s Executive Chairman, Van Tran, and expires on June 30,
2012. The commitment is for the corporate offices at 2445 Winnetka Avenue North, Golden Valley,
Minnesota. The total amount of the 2.75 year lease commitment is $138,600. The Company also has
month-to-month leases for corporate housing at 1300 Hillsboro, Golden Valley, Minnesota and 2415
Winnetka Ave. N., Golden Valley, Minnesota, which are leased from Larry Johanns, a principal of The
Matthews Group, LLC, and significant shareholder of the Company. The monthly lease obligations are
$1,000 and $1,200, respectively.
Our subsidiary, VTFS, entered into a twelve-month processing center contract beginning February 1,
2009, with monthly commitments of approximately $34,200.
In the quarter the Company also signed a consulting agreement with an entity for a period of 12
months. The financial commitment under this consulting agreement is $4,000 and 41,667 restricted
shares of the Company’s common stock per month, with a total potential financial commitment over
the full 12 month term of $48,000 and 500,000 shares of the Company’s common stock. Either party
may terminate the consulting agreement at any time, without cause, upon written notice to the
other.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Critical Accounting Policies
Stock-Based Compensation:
The Company accounts for stock-based compensation under Statement of Financial Accounting Standards
(SFAS) No. 123(R), “Share-Based Payment” using the modified prospective application method. SFAS
No. 123(R) requires the cost of employee compensation paid with equity instruments to be measured
based on grant-date fair values and recognized over the vesting period.
Revenue Recognition:
The Company accounts for revenue recognition in accordance with SEC Staff Accounting Bulletin
(SAB) No. 101 “Revenue Recognition in Financial Statements” and related amendments. Revenues for
the Company are classified into the following three separate categories: license revenue (Barcode
Technology), hardware revenue, and identification card services revenue.
Revenues from licenses, hardware, and identification cards are recognized when the product is
shipped and collection is reasonably assured. The process typically begins for license and hardware
revenue with a customer purchase order detailing its hardware specifications so the Company can
import its software into the customer’s hardware. Once importation is completed, if the customer
only wishes to purchase a license, the Company typically transmits the software to the customer via
the Internet. Revenue is recognized at that point. If the customer requests both license and
hardware products, once the software is imported into the hardware and the process is complete, the
product is shipped and revenue is recognized at time of shipment. Once the software and/or
hardware are either shipped or transmitted, the customers do not have a right of refusal or return.
Under some conditions, the customers remit payment prior to the Company having completed
importation of the software. In these instances, the Company delays revenue recognition and
reflects the prepayments as customer deposits.
The process for identification cards begins when a customer requests, via the Internet, an
identification card. The card is reviewed for design and placement of the data, printed and
packaged for shipment. At the time the identification cards are shipped and collection is
reasonably assured, revenue is recognized.
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| ITEM 3 | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Our financial instruments include cash and cash equivalents. Our cash and cash equivalents are not
subject to significant interest rate risk due to the short maturities of these instruments. As of
September 30, 2009, the carrying value of our cash and cash equivalents approximated fair value. We
have in the past and may in the future obtain marketable debt securities (principally consisting of
commercial paper, corporate bonds and government securities) having a weighted average duration of
one year or less. Consequently, such securities would not be subject to significant interest rate
risk. Our main investment objectives are the preservation of investment capital and the
maximization of after-tax returns on our investment portfolio. We do not use derivative instruments
for speculative or investment purposes.
| ITEM 4 | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
We maintain “disclosure controls and procedures” as defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure
that information required to be disclosed by us in reports we file or submit under the Exchange Act
is recorded, processed, summarized and reported within the time periods specified in the SEC’s
rules and forms, and that such information is accumulated and communicated to our management,
including our Chief Executive Officer/Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure. In designing and evaluating our disclosure controls and
procedures, management recognizes that disclosure controls and procedures, no matter how well
conceived and operated, can provide only reasonable assurance of achieving the desired objectives,
and we necessarily are required to apply our judgment in evaluating the cost-benefit relationship
of possible disclosure controls and procedures.
Our management, with the participation of our Chief Executive Officer/Chief Financial Officer, have
evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end
of the period covered by this report. It was concluded that the disclosure controls and procedures
were not effective, because certain deficiencies involving internal controls constituted material
weaknesses as discussed below. The material weaknesses identified did not result in the restatement
of any previously reported financial statements or any other related financial disclosures, nor
does management believe that it had any effect on the accuracy of our financial statements for the
current reporting period.
The material weaknesses relate to limited transitional oversight from a newly formed audit
committee on the external financial reporting process and internal controls over financial
reporting, lack of segregation of duties, and management failure to fully address auditors’
management letter comments. Under the segregation of duties issues, the Controller was the sole
preparer of the financial statements and periodic SEC reports with limited separate independent
detailed review to prevent material errors. Also the CEO has had authority to enter into
significant contracts, as well as authority to sign checks, which could result in material fraud.
In order to mitigate these material weaknesses to the fullest extent possible, the Company has
assigned its newly formed audit committee with oversight responsibilities. Financial statements,
periodic SEC reports and monthly bank statement and imaged checks are continuously reviewed by the
Controller, CEO/CFO and Executive Chair. In addition all significant contracts are now being
reviewed and signed off by the Company’s in-house attorney in conjunction with the CEO and the
Executive Chair. The audit committee will work with management to address and respond to all the
auditors’ management letter comments.
Internal Control over Financial Reporting
There have not been any changes in our internal control over financial reporting during the fiscal
year to which this report relates that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
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PART II
| ITEM 1 | LEGAL PROCEEDINGS |
From time to time, we are involved in various legal actions arising in the ordinary course of
business. In the opinion of our management, the ultimate dispositions of these matters will not
have a material adverse effect on our consolidated financial position and results of operations.
Currently, there are no significant legal matters pending.
| ITEM 1A | RISK FACTORS |
There have been no material changes to our risk factors and uncertainties during the three months
ended September 30, 2009. For a discussion of the Risk Factors, refer to the “Risk Factors”
section of Item 1 in the Company’s Annual Report on Form 10-K for the period ended June 30, 2009.
| ITEM 6 | EXHIBITS |
| 31.1 | CEO Certification required by Rule 13a14(a)/15d14(a) under the Securities Exchange Act of
1934. |
|||
| 31.2 | CFO Certification required by Rule 13a14(a)/15d14(a) under the Securities Exchange Act of
1934. |
|||
| 32.1 | Veritec, Inc. Certification of CEO/CFO pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 (18 U.S.C. §1350). |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
VERITEC, INC.
|
||||
By
|
/s/ Jeffrey Hattara
|
November 16, 2009 | ||
| President, Chief Executive Officer and Interim Chief Financial Officer | ||||
By
|
/s/ Van Tran | November 16, 2009 | ||
| Van Tran | ||||
| Executive Chairman of the Board | ||||
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