VERITEC,
INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
Fiscal
Years Ended June 30,
|
|
|
|
2018
|
|
2017
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(18,210
|
)
|
|
$
|
(1,369,807
|
)
|
|
Adjustments to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
—
|
|
|
|
171
|
|
|
Amortization
|
|
|
16,042
|
|
|
|
64,166
|
|
|
Gain on settlement of note payable to former
officer
|
|
|
—
|
|
|
|
(364,686
|
)
|
|
Expense related to the fair value of derivative
liabilities
|
|
|
—
|
|
|
|
182,000
|
|
|
Change in fair value of derivative liabilities
|
|
|
(603,000
|
)
|
|
|
546,000
|
|
|
Beneficial conversion
feature on issuance of convertible notes payable-related party
|
|
|
—
|
|
|
|
35,000
|
|
|
Interest accrued on notes payable
|
|
|
128,359
|
|
|
|
184,960
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
1,068
|
|
|
|
1,170
|
|
|
Prepaid expenses
|
|
|
(3,343
|
)
|
|
|
(88
|
)
|
|
Payroll tax liabilities
|
|
|
—
|
|
|
|
(238,718
|
)
|
|
Deferred revenues
|
|
|
(42,492
|
)
|
|
|
(66,268
|
)
|
|
Accounts payable
|
|
|
23,251
|
|
|
|
(1,207
|
)
|
|
Accrued
expenses
|
|
|
(8,594
|
)
|
|
|
(3,273
|
)
|
|
Net
cash used in operating activities
|
|
|
(506,919
|
)
|
|
|
(1,030,580
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Proceeds from convertible notes payable-related
party
|
|
|
—
|
|
|
|
477,500
|
|
|
Proceeds from notes payable-related
party
|
|
|
599,312
|
|
|
|
538,820
|
|
|
Net cash provided by financing
activities
|
|
|
599,312
|
|
|
|
1,016,320
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH
|
|
|
92,393
|
|
|
|
(14,260
|
)
|
|
CASH AT BEGINNING OF PERIOD
|
|
|
46,693
|
|
|
|
60,953
|
|
|
CASH AT END OF PERIOD
|
|
$
|
139,086
|
|
|
$
|
46,693
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
125,000
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
NON CASH INVESTING AND FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Reclassification of customer deposit to accounts
payable
|
|
$
|
—
|
|
|
$
|
25,000
|
|
|
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, 2018 AND 2017
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, including Security
First Bank (terminated in 2010), Palm Desert National Bank (which was later assigned to First California Bank and subsequently
Pacific Western Bank that terminated in 2013), and Central Bank of Kansas City (terminated in 2016). Veritec is 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. Intercompany
transactions and balances were eliminated in consolidation. Veritec’s wholly owned subsidiaries include Veritec Financial Systems, Inc., Tangible Payment Systems,
Inc., and Public Bell, Inc. (collectively the “Company”).
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, 2018 or 2017.
Revenue
Recognition
Revenues
for the Company are classified into mobile banking technology and management fee revenue.
a.
Mobile Banking Revenue
The
Company, as a merchant payment processor and a distributor, recognizes revenue from transaction fees charged to cardholders for
the use of its issued mobile debit cards. The fees are recognized on a monthly basis after all cardholder transactions have been
summarized and reconciled with third party processors.
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.
b.
Management Fee Revenue
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, 2019.
Derivative
Financial Instruments
The
Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify
as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument
is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported
in the consolidated statements of operations. The classification of derivative instruments, including whether such instruments
should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities
are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument
could be required within twelve (12) months of the balance sheet date.
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. Potential common stock are excluded from the computation as their effect is antidilutive.
For
the years ended June 30, 2018 and 2017, 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, 2018 and 2017, 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,
|
|
|
|
2018
|
|
2017
|
|
Series H Preferred Stock
|
|
|
10,000
|
|
|
|
10,000
|
|
|
Convertible Notes Payable
|
|
|
19,337,127
|
|
|
|
17,833,166
|
|
|
Options
|
|
|
2,500,000
|
|
|
|
2,500,000
|
|
|
Total
|
|
|
21,847,127
|
|
|
|
20,343,166
|
|
Stock-Based
Compensation
The
Company periodically issues stock options and warrants to employees and non-employees in capital raising transactions, for services
and for financing costs. The Company accounts for stock option and stock warrant grants to employees based on the authoritative
guidance provided by the Financial Accounting Standards Board (FASB) where the value of the award is measured on the date of grant
and recognized over the vesting period. The Company accounts for stock option and stock warrant grants to non-employees in accordance
with the authoritative guidance of the FASB where the value of the stock compensation is determined based upon the measurement
date at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance
to earn the equity instruments is complete. Non-employee stock-based compensation charges generally are amortized over the vesting
period on a straight-line basis. In certain circumstances where there are no future performance requirements by the non-employee,
option or warrant grants are immediately vested and the total stock-based compensation charge is recorded in the period of the
measurement date.
The
fair value of the Company’s common stock option and warrant grants are estimated using a Black-Scholes option pricing model,
which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the common stock options,
and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes option pricing model,
and based on actual experience. The assumptions used in the Black-Scholes option pricing model could materially affect compensation
expense recorded in future periods.
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, inventories, and accounts payable and accrued liabilities,
approximate the related fair values due to the short-term maturities of these instruments.
The
fair value of the derivative liabilities of $728,000 at June 30, 2017, was valued using Level 2 inputs.
Concentrations
During
the year ended June 30, 2018, the Company had one customer, a related party that represented 76% of our revenues. No other customer
represented more than 10% of our revenues.
During
the year ended June 30, 2017, the Company had one customer, a related party, that represented 53% of our revenues and one customer
that represented 14% of our revenues. No other customer represented more than 10% of our revenues.
During
the years ended June 30, 2018 and 2017, the Company had no foreign 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
May 2014, the Financial Accounting Standards Board (“FASB”) issued guidance creating Accounting Standards Codification
(“ASC”) Section 606, “
Revenue from Contracts with Customers.
” ASC 606 creates a five-step model
that requires entities to exercise judgment when considering the terms of contract(s), which includes (1) identifying the contract(s)
or agreement(s) with a customer, (2) identifying our 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. Under ASC 606, revenue is recognized when performance obligations under the terms of
a contract are satisfied, which occurs for the company upon shipment or delivery to our customers based on written sales terms,
which is also when control is transferred. Revenue is measured as the amount of consideration we expect to receive in exchange
for transferring products or services to a customer. The updated guidance is effective for public business entities for fiscal
years beginning after December 15, 2017, and interim periods within that year. The Company will adopt this guidance effective
July 1, 2018 using the modified retrospective method applied to all contracts not completed as of July 1, 2018. Due to the nature
of the products sold by the Company, the adoption of the new standard will have no quantitative effect on the Company’s
financial statements.
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 comparative period presented in the financial statements, with certain practical expedients available. The Company
is in the process of evaluating the impact of ASU 2016-02 on the Company’s financial statements and 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, 2018, the Company recorded a loss of $18,210, used cash in operating activities of $506,919, and at June 30, 2018, the
Company had a stockholders’ deficiency of $4,461,189. In addition, as of June 30, 2018, the Company is delinquent in payment
of $761,315 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, 2018 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 2019 and to continue to develop its
existing projects and plans to raise such funds by finding additional investors to purchase the Company’s securities, generating
sufficient sales revenue, implementing dramatic cost reductions or any combination thereof. There is no assurance that the Company
can be successful in raising such funds, generating the necessary sales or reducing major costs. Further, if the Company is successful
in raising such funds from sales of equity securities, the terms of these sales may cause significant dilution to existing holders
of common stock. The consolidated financial statements do not include any adjustments that may result from this uncertainty.
NOTE
3 – INTANGIBLE ASSETS AND CONTINGENT EARNOUT LIABILITY
On
September 30, 2014, the Company and Tangible Payments LLC, a Maryland Limited Liability Company, entered into an Asset Purchase
Agreement pursuant to which the Company acquired certain assets and liabilities of the Tangible Payments LLC. Tangible Payments
LLC developed online payment technology that encrypts sensitive information securely between customers and merchants during online
transactions.
The
purchase price for the acquisition was comprised of 250,000 shares of restricted common stock of Veritec valued at $37,500, issued
on closing, and an earnout payment of $155,000 for an aggregate purchase price of $192,500. The earnout payment is payable on
a monthly basis from the net profits derived from the acquired assets commencing three months after the closing. The earnout payment
is accelerated and the balance of the earnout payment shall be due in full at such time as Veritec receives equity investments
aggregating $1,300,000. For the years ended June 30, 2018 and 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
years ended June 30, 2018 and 2017, the Company recorded $16,042 and $64,166 of amortization expense related to this intangible
which is included in general and administrative expense in the Consolidated Statements of Operations. As of June 30, 2018, there
was no remaining unrecognized amortization expense related to intangible assets.
NOTE
4 – CONVERTIBLE NOTES AND NOTES PAYABLE
Convertible
notes and notes payable-in default
Notes
payable includes principal and accrued interest and consists of the following at June 30, 2018 and June 30, 2017:
|
|
|
|
June 30,
2018
|
|
June 30,
2017
|
|
(a)
|
Convertible notes-in default
|
|
$
|
214,576
|
|
|
$
|
205,116
|
|
|
(b)
|
Notes payable-in default
|
|
|
387,684
|
|
|
|
370,207
|
|
|
|
Total notes-third parties
|
|
$
|
602,260
|
|
|
$
|
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, 2016, convertible notes totaled $195,655. During the year ended June 30, 2017, interest of $9,460
was added to principal, leaving a balance owed of $205,116 at June 30, 2017. 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. At June 30, 2018, $176,506 of the convertible notes
were in default, and convertible at a conversion price of $0.30 per share into 588,354 shares of the Company’s common stock.
Certain of the amounts due are subject to a legal proceeding (see Note 10). The balance of $38,070 is due on demand and convertible
at a conversion price of $0.08 per share into 475,875 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, 2016, the notes totaled $352,729 and during the year ended June 30, 2017, interest of $17,478 was added to principal,
leaving a balance owed of $370,207 at June 30, 2017. During the year ended June 30, 2018, interest of $17,477 was added to principal
leaving a balance owed of $387,684 at June 30, 2018. At June 30, 2018, $351,901 of notes are secured by the Company’s intellectual
property and $35,783 of notes are unsecured.
Convertible
notes and notes payable-related party
Notes
payable-related party includes principal and accrued interest and consists of the following at June 30, 2018 and June 30, 2017:
|
|
|
|
June 30,
2018
|
|
June 30,
2017
|
|
(a)
|
Convertible notes-The Matthews Group
|
|
$
|
1,344,782
|
|
|
$
|
1,236,943
|
|
|
(b)
|
Notes payable-The Matthews Group
|
|
|
1,384,088
|
|
|
|
805,195
|
|
|
(c)
|
Convertible notes-other related-in default
|
|
|
265,729
|
|
|
|
251,728
|
|
|
|
Total notes-related party
|
|
$
|
2,994,599
|
|
|
$
|
2,293,866
|
|
(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 9) 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, 2016, convertible notes due to The Matthews Group totaled $669,648. During the year ended June 30, 2017, $477,500 of
convertible notes were issued and interest of $89,795 was added to principal leaving a balance payable of $1,236,943 at June 30,
2017. The Company determined that upon issuance of certain convertible notes issued in the second quarter of fiscal 2017, there
become insufficient authorized shares of common stock available for conversion. Accordingly, the fair value of the conversion features
for these convertible notes were recorded as derivative liabilities with a corresponding discount to the related notes. The Company
determined the fair value of the conversion features were $182,000 (see Note 5). As the convertible notes are due on demand, the
$182,000 discount was expensed upon issuance. 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. At June 30, 2018, the notes are convertible at a conversion price of
$0.08 per share into 16,809,779 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 9) dated September 30, 2015. At June 30, 2016, notes due
to The Matthews Group totaled $216,648. During the year ended June 30, 2017, $538,820 of notes payable were issued and
interest of $49,727 was added to principal leaving a balance owed of $805,195. During the year ended June 30, 2018, $599,312
of notes payable were issued, interest of $104,581was added to principal, and an interest payment of $125,000 was made,
leaving a balance owed of $1,384,088 at June 30, 2018.
(c)
The notes are due to a current and a former director, are unsecured, convertible into common stock at per share amounts ranging
from $0.10 to $0.30, and bear interest at rates ranging from 8% to 10% per annum.
At June 30, 2016, convertible notes due other
related parties totaled $237,725. During the year ended June 30, 2017, interest of $14,003 was added to principal leaving a balance
owed of $251,728 at June 30, 2017. 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. At June 30, 2018, $197,124 of the notes were due in 2010 and are in default, and the balance
of $68,605 is due on demand. At June 30, 2018, $197,124 of the notes are convertible at a conversion price of $0.30 per share into
657,080 shares of the Company’s common stock, $20,581 of the notes are convertible at a conversion price of $0.10 per share
into 205,810 shares of the Company’s common stock, and $48,024 of the notes are convertible at a conversion price of $0.08
per share into 600,289 shares of the Company’s common stock.
NOTE
5 - DERIVATIVE LIABILITIES
During fiscal 2017, the Company determined
there were insufficient authorized shares of common stock available for conversion of certain of its convertible notes issued
in the second quarter of fiscal 2017 (See Note 4) and therefore the conversion feature of the notes did not meet equity classification.
Based on this, the Company recorded derivative liabilities of $182,000 upon the issuance of these convertible notes. Subsequent
to this recording and through June 30, 2017, the Company recorded a change in the fair value of the derivative liabilities of
$546,000. At June 30, 2017, total derivative liabilities were $728,000. On April 18, 2018, the Company increased its authorized
shares from 50,000,000 to 150,000,000 shares and therefore, the Company determined it had sufficient authorized shares available
to meet equity classification for the conversion features of its convertible notes. Accordingly, on April 14, 2018, the Company
remeasured the derivative liabilities to their fair value of $125,000, and recorded a gain in fair value of the derivative of
$603,000. The balance of the derivative of $125,000 was then reclassified to equity and recorded as a credit to additional paid-in
capital in accordance with ASC 815-15-35-4.
The
derivative liability was valued at the following dates using a Black-Scholes-Merton model with the following assumptions:
|
|
|
April
18,
2018
(date reclassified to equity)
|
|
June
30,
2017
|
|
July
11,
2016
to
December
31,
2016
(dates of inception)
|
|
Conversion feature:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
1.24
|
%
|
|
|
1.50
|
%
|
|
|
0.07
|
%
|
|
Expected volatility
|
|
|
130
|
%
|
|
|
179
|
%
|
|
|
99%
to 124%
|
|
|
Expected life (in years)
|
|
|
1
year
|
|
|
|
1-2.5
years
|
|
|
|
1-1.5
years
|
|
|
Expected dividend yield
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
Fair Value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion feature
|
|
$
|
125,000
|
|
|
$
|
728,000
|
|
|
$
|
182,000
|
|
The
risk-free interest rate was based on rates established by the Federal Reserve Bank. The Company used its own historical stock’s
volatility as the estimated volatility. The expected life of the conversion feature of the notes or options was based on the estimated
remaining terms of the notes or options, or expected settlement date for notes due on demand or that have matured. The expected
dividend yield was based on the fact that the Company has not customarily paid dividends to its holders of common stock in the
past and does not expect to pay dividends to holders of its common stock in the future.
NOTE
6 - STOCKHOLDERS’ DEFICIENCY
Preferred
Stock
The
articles of incorporation of Veritec authorize 10,000,000 shares of preferred stock with a par value of $1.00 per share. The Board
of Directors is authorized to determine any number of series into which shares of preferred stock may be divided and to determine
the rights, preferences, privileges and restrictions granted to any series of the preferred stock.
In
1999, a new Series H convertible preferred stock was authorized. Each share of Series H convertible preferred stock is convertible
into 10 shares of the Veritec’s common stock at the option of the holder. As of June 30, 2018 and 2017, 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 to 150,000,000
common shares. The Company filed the requisite 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, 2018 and 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 consolidated financial statements.
NOTE
7 – STOCK OPTIONS
A
summary of stock options as of June 30, 2018 and for the two years then ended is as follows:
|
|
|
Number of Shares
|
|
Weighted - Average
Exercise Price
|
|
Outstanding
at June 30, 2016
|
|
|
2,500,000
|
|
|
$
|
0.08
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
Forfeited
|
|
|
—
|
|
|
$
|
0.08
|
|
|
Outstanding
at June 30, 2017
|
|
|
2,500,000
|
|
|
$
|
0.08
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
Forfeited
|
|
|
—
|
|
|
$
|
0.08
|
|
|
Outstanding
at June 30, 2018
|
|
|
2,500,000
|
|
|
$
|
0.08
|
|
|
Exercisable
at June 30, 2018
|
|
|
2,500,000
|
|
|
$
|
0.08
|
|
The Company has agreements with certain
employees that provide for five years of annual grants of options, on each employment anniversary date, to purchase shares of
the Company’s common stock. The option price is determined based on the market price on the date of grant, the options vest
one year from the date of grant, and the options expire five years after vesting. The Company granted 2,500,000 options under
this arrangement. There were no options granted in 2018 and 2017 under this agreement. Both the outstanding and exercisable stock
options had no intrinsic value at June 30, 2018.
Additional
information regarding options outstanding as of June 30, 2018 is as follows:
|
Options Outstanding
at June 30, 2018
|
|
Options Exercisable
at June 30, 2018
|
|
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
|
|
|
|
1.64
|
|
|
$
|
0.08
|
|
|
|
2,500,000
|
|
|
$
|
0.08
|
|
|
|
|
|
|
|
2,500,000
|
|
|
|
|
|
|
|
|
|
|
|
2,500,000
|
|
|
|
|
|
NOTE
8 - INCOME TAXES
For
the years ended June 30, 2018, net income was $106,790, as compared to net loss of $1,369,907 for the year ended June 30, 2017.
For the years ended June 30, 2018 and 2017, no provision for income taxes was recorded. We made no provision for income taxes
due to our utilization of federal net operating loss carry forwards to offset both regular taxable income and alternative minimum
taxable income.
Reconciliation
between the expected federal income tax rate and the actual tax rate is as follows:
|
|
|
Year
Ended June 30,
|
|
|
|
2018
|
|
2017
|
|
Federal statutory tax rate
|
|
|
28
|
%
|
|
|
35
|
%
|
|
State tax, net of federal benefit
|
|
|
6
|
%
|
|
|
6
|
%
|
|
Total tax rate
|
|
|
34
|
%
|
|
|
40
|
%
|
|
Allowance
|
|
|
(34
|
)%
|
|
|
(40
|
)%
|
|
Effective tax rate
|
|
|
—
|
%
|
|
|
—
|
%
|
The
following is a summary of the deferred tax assets:
|
|
|
Year
Ended June 30,
|
|
|
|
2018
|
|
2017
|
|
Net operating loss carryforwards
|
|
$
|
2,580,000
|
|
|
$
|
4,665,000
|
|
|
Derivative liabilities
|
|
|
—
|
|
|
|
290,000
|
|
|
Intangibles, net
|
|
|
—
|
|
|
|
70,000
|
|
|
Deferred tax assets before valuation allowance
|
|
|
2,580,000
|
|
|
|
5,025,000
|
|
|
Valuation allowance
|
|
|
(2,580,000
|
)
|
|
|
(5,025,000
|
)
|
|
Net deferred tax asset
|
|
$
|
—
|
|
|
$
|
—
|
|
The
Company has provided a valuation allowance on the deferred tax assets at June 30, 2018 and 2017 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, 2018 was a decrease of $111,000.
Veritec
has net operating loss carryforwards of approximately $12,284,000 million for federal purposes available to offset future taxable
income that expire in varying amounts through 2035. The ability to utilize the net operating loss carry forwards could be limited
by Section 382 of the Internal Revenue Code which limits their use if there is a change in control (generally a greater than 50%
change in ownership). The Company is subject to examination by tax authorities for all years for which a loss carry forward is
utilized in subsequent periods.
The
Company follows FASB guidelines that address the determination of whether tax benefits claimed or expected to be claimed on a
tax return should be recorded in the financial statements. Under this guidance, we may recognize the tax benefit from an uncertain
tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities,
based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should
be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.
This guidance also provides guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim
periods and requires increased disclosures. As of June 30, 2018 and 2017, 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, 2018
and 2017, the Company has no accrued interest or penalties related to uncertain tax positions.
NOTE
9 – RELATED PARTY TRANSACTIONS
The
Matthews Group is owned 50% by Ms. Van Tran, the Company’s CEO/Executive Chair and a director, and 50% by Larry Johanns,
a significant stockholder of the Company. The Company has relied on The Matthews Group for funding (see Note 4).
Management
Services Agreement and Related Notes Payable with Related Party
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, 2019 from the barcode technology operations. During the year ended June 30, 2018 and 2017, the Company recorded
management fee revenue related to this agreement of $376,580 and $172,930, 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, 2018 and 2017, cash
flow loans of $599,312 and $538,820, respectively, were made to the Company at 10% interest per annum and due on demand. At June
30, 2018, cash flow loans of $1,384,088 are due to The Matthews Group (see Note 4).
Convertible Notes Activity with Related
Parties (see Note 4)
During the year ended June 30, 2017, the Company
issued $477,500 of convertible notes payable to The Matthews Group. The convertible notes payable-related party can be converted
at a price of $0.08 per share. The market price on the date some of the convertible notes payable-related party were issued was
in excess of the conversion price, and as a result the Company recognized an expense of $35,000 which is included in interest expense.
No convertible notes were issued to
The Matthews Group during the year ended June 30, 2018
Advances
from Related Parties
From
time to time, Ms. Van Tran provides advances to finance the Company’s working capital requirements. As of June 30, 2018
and 2017, total advances to Ms. Van Tran amounted to $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. For both the years ended June 30, 2018 and 2017, rental payments to Ms. Van
Tran totaled $51,000.
On
March 1, 2017, the Company’s wholly owned subsidiary, Public Bell, Inc., entered into an Exclusive Product Provider Agreement
(“Agreement”) with an affiliate of American Heritage College (AHC). Ms. Van Tran, the Company’s CEO/Executive
Chair, is a part owner of the affiliate of AHC. Public Bell paid AHC $50,000 in exchange for AHC agreeing to purchase Wi-Fi/WiMax
broadband equipment exclusively from Public Bell and for the exclusive right to provide future products and services to AHC. During
the year ended June 30, 2017, the $50,000 paid to AHC was recorded to sales and marketing expense
in
the accompanying Consolidated Statements of Operations.
NOTE
10 – 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 seek 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 that Plaintiffs seek, Plaintiffs sought an award or settlement in the amount of $162,990. If Plaintiff’s prevail
on their claims, the Court could award Plaintiffs the unpaid principal in the amount of $90,000, plus interest at the rate of
eight percent (8%) per annum on the unpaid balance, as well as attorney’s fees incurred by Plaintiffs in seeking payment
on the promissory note in an amount determined by the Court. An award of attorney’s fees could be significant. Veritec has
vigorously defended Plaintiffs claims and has asserted a variety of counterclaims against Plaintiffs. Veritec has also attempted
to engage Plaintiffs in settlement discussions, but Plaintiffs have not engaged in meaningful negotiations to resolve the claims
in dispute. Management has recorded a liability related to this proceeding that it feels is adequate.
On
September 21, 2016, the Company entered into a settlement agreement with an individual who was a former officer of the Company.
The individual in prior years was also issued 500,000 shares of common stock for services. The Company alleged that the
individual used the Company's intellectual property without approval. Under the terms of the settlement agreement, the
individual agreed to relinquish a convertible note payable and unpaid interest aggregating $364,686, and return 500,000 shares
of common stock previously issued to him. In turn, the Company agreed to release and discharge the individual against all
claims arising on or prior to the date of the settlement agreement. The Company recorded a gain on the settlement of $364,686
in the accompanying Consolidated Statements of Operations for the year ended June 30, 2017. As of June 30, 2018, the 500,000 shares
have not been relinquished. When the Company receives the shares, it will record a cancellation of shares.
NOTE
11 – 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, 2018, the Company had not achieved an 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.