UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

 

☒QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 20192020

 

☐TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to __________

 

Commission File Number: 000-15113

 

VERITEC, INC.

(Exact name of registrant as specified in its charter)

 

Nevada95-3954373
(State or other jurisdiction of(I.R.S. Employer
incorporation or organization)Identification No.)

 

2445 Winnetka Avenue N.

Golden Valley, MN 55427

(Address of principal executive offices) (zip code)

 

(763) 253-2670

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the 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 ☒  No ☐

 

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☒  No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐Accelerated filer ☐
Non-accelerated filer☐Smaller reporting company☒
(Do not check if a smaller reporting company)Emerging growth company ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐  No ☒

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐  No ☒

 

Title of Each ClassTrading Symbol(s)SymbolName of Each Exchange on Which Registered
Common Stock, $0.01 par value $0.01 per shareVRTCOTC Pink

 

The number of shares of registrant’s common stock outstanding as of April 30, 20192020, was 39,538,007.39,738,007.

 

 1 

 

 

VERITEC, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

 

PART I 
ITEM 1 FINANCIAL STATEMENTS4
ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL AND RESULTS OF OPERATIONS1617
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK2122
ITEM 4 CONTROLS AND PROCEDURES2122
PART II 
ITEM 1 LEGAL PROCEEDINGS2223
ITEM 1A RISK FACTORS2223
ITEM 2 UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS2223
ITEM 3 DEFAULTS UPON SENIOR SECURITIES2223
ITEM 4 MINE SAFETY DISCLOSURES2223
ITEM 5 OTHER INFORMATION2223
ITEM 6 EXHIBITS2223
SIGNATURES2324

 

 2 

 

 

FORWARD LOOKINGFORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q, including "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 2 of Part I of this report include forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by forward-looking statements.

 

In some cases, you can identify forward-looking statements by terminology such as "may," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "proposed," "intended," or "continue" or the negative of these terms or other comparable terminology. You should read statements that contain these words carefully because they discuss our expectations about our future operating results or our future financial condition or state other "forward-looking" information. There may be events in the future that we are not able to accurately predict or control. Before you invest in our securities, you should be aware that the occurrence of any of the events described in this Quarterly Report could substantially harm our business, results of operations and financial condition, and that upon the occurrence of any of these events, the trading price of our securities could decline, and you could lose all or part of your investment. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, growth rates, and levels of activity, performance, or achievements. We are under no duty to update any of the forward-looking statements after the date of this Quarterly Report to conform these statements to actual results.

 

 3 

 

 

PART I

 

ITEM 1 FINANCIAL STATEMENTS

 

VERITEC, INC. AND SUBSIDIARIES
CONSENSEDCONDENSED CONSOLIDATED BALANCE SHEETS

 

 

March 31,

2019

 

June 30,

2018

 

March 31,

2020

 

June 30,

2019

 (Unaudited)   (Unaudited)  
ASSETS                
Current Assets:                
Cash $112,264  $139,086  $169,305  $91,112 
Accounts receivable  14,410   7,071   2,250   9,117 
Prepaid expenses  5,987   5,328   4,184   5,391 
Total Assets $132,661  $151,485  $175,739  $105,620 
                
LIABILITIES AND STOCKHOLDERS’ DEFICIENCY                
Current Liabilities:                
Accounts payable $767,986  $671,197  $678,634  $716,704 
Accounts payable, related party  96,110   96,110   121,835   100,360 
Accrued expenses  118,809   63,507   59,926   63,363 
Convertible notes and notes payable (includes $583,299 and $563,826 of convertible notes and notes payable in default)  632,479   602,261 
Convertible notes and notes payable, related party (includes $203,874 and $265,729 of notes payable, related party in default)  3,450,173   2,994,599 
Deferred revenues  7,500   30,000 
Customer deposits  75,244   68,251 
Convertible notes and notes payable ($436,456 and $589,668 in default)  502,986   654,352 
Convertible notes and notes payable, related parties ($212,874 and $206,124 in default)  4,221,180   3,646,967 
Total Current Liabilities  5,073,057   4,457,674   5,659,805   5,249,997 
Contingent earnout liability  155,000   155,000   155,000   155,000 
Total Liabilities  5,228,057   4,612,674   5,814,805   5,404,997 
                
Commitments and Contingencies                
                
Stockholders' Deficiency:                
Convertible preferred stock, par value $1.00; authorized 10,000,000 shares, 276,000 shares of Series H authorized, 1,000 shares issued and outstanding  1,000   1,000   1,000   1,000 
Common stock, par value $.01; authorized 150,000,000 shares and 50,000,000 shares, respectively; 39,538,007 shares issued and outstanding  395,380   395,380 
Common stock to be issued, 145,000 shares to be issued  12,500   12,500 
Common stock, par value $.01; authorized 150,000,000 shares; 39,738,007 and 38,538,007 shares issued and outstanding, respectivley  397,380   395,380 
Common stock to be issued, 145,000 shares  12,500   12,500 
Additional paid-in capital  18,105,470   18,099,576   18,135,123   18,110,791 
Accumulated deficit  (23,609,746)  (22,969,645)  (24,185,069)  (23,819,048)
Total Stockholders' Deficiency  (5,095,396)  (4,461,189)  (5,639,066)  (5,299,377)
Total Liabilities and Stockholders’ Deficiency $132,661  $151,485  $175,739  $105,620 
                
See accompanying notes.

 

 4 

 

VERITEC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 20192020 AND 20182019
(UNAUDITED)

 

  Three months ended
March 31,		 Nine months ended
December 31,
  2019 2018 2019 2018
  (Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenue:                
Mobile banking technology revenue $29,604  $31,324  $90,194  $92,441 
Other revenue, management fee related party  44,536   35,034   137,052   208,527 
Total revenue  74,140   66,358   227,246   300,968 
                 
Cost of sales  57,697   61,189   175,869   168,305 
                 
Gross profit  16,443   5,169   51,377   132,663 
                 
Operating expenses                
General and administrative expenses  143,451   132,381   457,001   446,308 
Research and development  12,403   —     12,453   19,938 
Total operating expenses  155,854   132,381   469,454   466,246 
                 
Loss from operations  (139,411)  (127,212)  (418,077)  (333,583)
                 
Other income (expenses)                
Change in fair value of derivative liability  —     (186,829)  —     519,582 
Interest expense (1)  (75,547)  (63,274)  (222,024)  (181,009)
Total other income (expenses)  (75,547)  (250,103)  (222,024)  338,573 
                 
Net income (loss) $(214,958) $(377,315) $(640,101) $4,990 
                 
BASIC AND DILUTED INCOME (LOSS) PER SHARE $(0.01) $(0.01) $(0.02) $0.00 
WEIGHTED - AVERAGE COMMON SHARES OUTSTANDING BASIC AND DILUTED  39,538,007   39,538,007   39,538,007   39,538,007 
                 
(1) Includes interest expense to related parties $68,798  $56,538  $201,805  $160,805 
                 
See accompanying notes.

 

  Three months ended
March 31,		 Nine months ended
March 31,
  2020 2019 2020 2019
  (Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenue:        
Mobile banking technology revenue $16,934  $29,604  $67,557  $90,194 
Other revenue, management fee related party  100,779   44,536   276,203   137,052 
Total revenue  117,713   74,140   343,760   227,246 
                 
Cost of sales  52,876   57,697   163,057   175,869 
Gross profit  64,837   16,443   180,703   51,377 
                 
Operating Expenses:                
Selling, general and administrative expenses (1)  162,325   143,451   462,236   457,001 
Research and development  —     12,403   —     12,453 
Total operating expenses  162,325   155,854   462,236   469,454 
                 
Loss from operations  (97,488)  (139,411)  (281,533)  (418,077)
                 
Other Income (Expense)                
Gain on extinguishment of convertible note payable  —     —     166,921   —   
Interest expense (2)  (84,452)  (75,547)  (251,409)  (222,024)
Total other income (expense)  (84,452)  (75,547)  (84,488)  (222,024)
                 
Net Loss $(181,940) $(214,958) $(366,021) $(640,101)
                 

Net Loss Per Common Share –

Basic and Diluted

 $(0.00) $(0.01) $(0.01) $(0.02)
                 
Weighted Average Number of Shares Outstanding – Basic and Diluted  39,735,809   39,538,007   39,672,314   39,538,007 
                 
(1) Includes general and administrative expenses to related party $12,750  $12,750  $38,250  $38,250 
(2) Includes interest expense to related parties $79,268  $68,798  $233,356  $201,805 

                
See accompanying notes.

 5 

 

 

VERITEC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIENCY

 

  Three months ended March 31, 2019 (Unaudited)
   Preferred Stock   Common Stock                 
   Shares    Amount    Shares   Amount    Common Stock to be Issued    Additional Paid-in Capital    Accumulated Deficit    Stockholders’ Deficiency  
BALANCE, December 31, 2018  1,000  $1,000   39,538,007  $395,380  $12,500  $18,100,148  $(23,394,788) $(4,885,760)
Stock-Based Compensation  —     —     —     —     —     5,322   —     5,322 
Net loss  —     —     —     —     —     —     (214,958)  (214,958)
BALANCE, March 31, 2019(Unaudited)  1,000  $1,000   39,538,007  $395,380  $12,500  $18,105,470  $(23,609,746) $(5,095,396)

THREE MONTHS ENDED MARCH 31, 2020

(UNAUDITED) 

 

  Nine months ended March 31, 2019 (Unaudited)
   Preferred Stock   Common Stock                 
   Shares    Amount    Shares   Amount    Common Stock to be Issued    Additional Paid-in Capital    Accumulated Deficit    Stockholders’ Deficiency  
BALANCE, June 30, 2018  1,000  $1,000   39,538,007  $395,380  $12,500  $18,099,576  $(22,969,645) $(4,461,189)
Stock-Based Compensation  —     —     —     —     —     5,894   —     5,894 
Net loss  —     —     —     —     —     —     (640,101)  (640,101)
BALANCE, March 31, 2019(Unaudited)  1,000  $1,000   39,538,007  $395,380  $12,500  $18,105,470  $(23,609,746) $(5,095,396)
   Preferred Stock   Common Stock                 
   Shares    Amount    Shares   Amount    Common Stock to be Issued    Additional Paid-in Capital    Accumulated Deficit    Stockholders’ Deficiency  
Balance, December 31, 2019  1,000  $1,000   39,538,007  $395,380  $12,500  $18,120,861  $(24,003,129) $(5,473,388)
Common stock issued for services  —     —     200,000   2,000   —     8,000   —     10,000 
Stock-Based Compensation  —     —     —     —     —     6,262   —     6,262 
Net Loss  —     —     —     —     —     —     (181,940)  (181,940)
Balance, March 31, 2020(Unaudited)  1,000  $1,000   39,738,007  $397,380  $12,500  $18,135,123  $(24,185,069) $(5,639,066)

NINE MONTHS ENDED MARCH 31, 2020

(UNAUDITED) 

   Preferred Stock   Common Stock                 
   Shares   Amount   Shares   Amount   Common Stock to be Issued   Additional Paid-in Capital   Accumulated Deficit   Stockholders’ Deficiency 
Balance, June 30, 2019  1,000  $1,000   39,538,007  $395,380  $12,500  $18,110,791  $(23,819,048) $(5,299,377)
Common stock issued for services  —     —     200,000   2,000   —     8,000   —     10,000 
Stock-Based Compensation  —     —     —     —     —     16,332   —     16,332 
Net Loss  —     —     —     —     —     —     (366,021)  (366,021)
Balance, March 31, 2020(Unaudited)  1,000  $1,000   39,738,007  $397,380  $12,500  $18,135,123  $(24,185,069) $(5,639,066)

 

See accompanying notes.

 6 

 

 

VERITEC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIENCY (continued)

 

  Three months ended March 31, 2018 (Unaudited)
   Preferred Stock   Common Stock                 
   Shares    Amount    Shares   Amount    Common Stock to be Issued    Additional Paid-in Capital    Accumulated Deficit    Stockholders’ Deficiency  
BALANCE, December 31, 2017  1,000  $1,000   39,538,007  $395,380  $12,500  $17,974,576  $(22,569,130) $(4,185,674)
Net loss  —     —     —     —     —     —     (377,315)  (377,315)
BALANCE, March 31, 2018(Unaudited)  1,000  $1,000   39,538,007  $395,380  $12,500  $17,974,576  $(22,946,445) $(4,562,989)

THREE MONTHS ENDED MARCH 31, 2019
(UNAUDITED)

 

  Nine months ended March 31, 2018 (Unaudited)
   Preferred Stock   Common Stock                 
   Shares    Amount    Shares   Amount    Common Stock to be Issued    Additional Paid-in Capital    Accumulated Deficit    Stockholders’ Deficiency  
BALANCE, June 30, 2017  1,000  $1,000   39,538,007  $395,380  $12,500  $17,974,576  $(22,951,435) $(4,567,979)
Net income  —     —     —     —     —     —     4,990   4,990 
BALANCE, March 31, 2018(Unaudited)  1,000  $1,000   39,538,007  $395,380  $12,500  $17,974,576  $(22,946,445) $(4,562,989)
   Preferred Stock   Common Stock                 
   Shares    Amount    Shares   Amount    Common Stock to be Issued    Additional Paid-in Capital    Accumulated Deficit    Stockholders’ Deficiency  
Balance, December 31, 2018  1,000  $1,000   39,538,007  $395,380  $12,500  $18,100,148  $(23,394,788) $(4,885,760)
Stock-based compensation  —     —     —     —     —     5,322   —     5,322 
Net Loss  —     —     —     —     —     —     (214,958)  (214,958)
Balance, March 31, 2019(Unaudited)  1,000  $1,000   39,538,007  $395,380  $12,500  $18,105,470  $(23,609,746) $(5,095,396)

NINE MONTHS ENDED MARCH 31, 2019
(UNAUDITED)

   Preferred Stock   Common Stock                 
   Shares    Amount    Shares   Amount    Common Stock to be Issued    Additional Paid-in Capital    Accumulated Deficit    Stockholders’ Deficiency  
Balance, June 30, 2018  1,000  $1,000   39,538,007  $395,380  $12,500  $18,099,576  $(22,969,645) $(4,461,189)
Stock-based compensation  —     —     —     —     —     5,894   —     5,894 
Net Loss  —     —     —     —     —     —     (640,101)  (640,101)
Balance, March 31, 2019(Unaudited)  1,000  $1,000   39,538,007  $395,380  $12,500  $18,105,470  $(23,609,746) $(5,095,396)

 

See accompanying notes.

 

 7 

 

 

VERITEC, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

 

  Nine months ended December 31,
  2018 2018
  (Unaudited) (Unaudited)
Cash Flows from Operating Activities        
Net income (loss) $(640,101) $4,990 
Adjustments to Reconcile Net income (loss) to Net Cash Used in Operating Activities        
Amortization  —     16,042 
Change in the fair value of derivative liability  —     (519,582)
Stock-based compensation expense  5,894   —   
Interest accrued on notes payable  222,024   181,009 
Changes in Assets and Liabilities        
(Increase) Decrease in:        
Accounts receivable  (7,339)  (493)
Prepaid expenses  (659)  (2,110)
(Decrease) Increase in:        
Accounts payable  96,788   (2,780)
Accrued expense  55,302   (14,057)
Deferred revenues  (22,500)  (34,993)
Net Cash Used in Operating Activities  (290,591)  (371,974)
         
Cash Flows from Financing Activities        
Proceeds from note payable  10,000   —   
Proceeds from notes payable - related party  253,769   359,044 
Net Cash Provided by Financing Activities  263,769   359,044 
         
Net decrease in cash  (26,822)  (12,930)
Cash beginning of period  139,086   46,693 
Cash end of period $112,264  $33,763 
         
Interest paid $—    $—   
Taxes paid $—    $—   
         
See accompanying notes.

  Nine months ended March 31,
  2020 2019
  (Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES        
Net Loss $(366,021) $(640,101)
Adjustments to reconcile net loss to net cash used in operating activities:        
Interest accrued on notes payable  248,911   222,024 
Common stock issued for services  10,000   —   
Stock-based compensation  16,332   5,894 
Gain on extinguishment of convertible note payable  (166,921)  —   
Changes in operating assets and liabilities:        
Accounts receivable  6,867   (7,339)
Prepaid expenses  1,207   (659)
Customer deposits  6,993   —   
Deferred revenue  —     (22,500)
Accounts payable  (38,070)  96,788 
Accounts payable, related party  21,475   —   
Accrued expense  (3,437)  55,302 
Net cash used in operating activities  (262,664)  (290,591)
         
CASH FLOWS FROM FINANCING ACTIVITIES        
Proceeds from notes payable  —     10,000 
Proceeds from notes payable - related party  340,857   253,769 
Net cash provided by financing activities  340,857   263,769 
         
NET INCREASE (DECREASE) IN CASH  78,193   (26,822)
CASH AT BEGINNING OF PERIOD  91,112   139,086 
CASH AT END OF PERIOD $169,305  $112,264 
         
SUPPLEMENTAL DISCOSURE OF CASH FLOW INFORMATION        
Cash paid for interest $—    $—   
Cash paid for taxes $—    $—   
         

 See accompanying notes.

 8 

 

  

VERITEC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED MARCH 31, 2020 AND 2019
(UNAUDITED)

NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The Company

 

Veritec, Inc. (Veritec) was formed in the State of Nevada on September 8, 1982. Veritec’s wholly ownedwholly-owned subsidiaries include Veritec Financial Systems, Inc., Tangible Payment Systems, Inc., and Public Bell, Inc. (collectively the “Company”).

 

Nature of Business

 

The CompanyVeritec is currentlyprimarily engaged in the development, marketing, sales and licensing of products and professional services related to mobile banking prepaid debit cards. and payment processing business.

As a Cardholder Independent Sales Organization, Veritec is able tocan promote and sell Visa brandedVisa-branded card programs. As a Third-Party Servicer, Veritec provides back-end cardholder transaction processing services for Visa brandedVisa-branded card programs on behalf of aits sponsoring bank. The CompanyVeritec has a portfolio of five United States and eight foreign patents. Also, Veritec has seven U.S. and twenty-eight foreign pending patent applications. Veritec had agreements with various banks in the past and is currently seeking a bank to sponsor its Prepaid Card programs. The Company has a portfolio of five United States and eight foreign patents. In addition, the Company has seven U.S. and twenty-eight foreign pending patent applications.

 

BASIS OF PRESENTATION

 

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with United States of America generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q. Accordingly, the Condensed Consolidated Financial Statements do not include all of the information and footnotes required for complete financial statements.

 

In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the period ended March 31, 2019,2020, are not necessarily indicative of the results that may be expected for the year ending June 30, 2019.2020. The Condensed Consolidated Balance Sheet information as of June 30, 20182019, was derived from the Company’s audited Consolidated Financial Statements as of and for the year ended June 30, 20182019, included in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on October 5, 2018.September 30, 2019. These financial statements should be read in conjunction with that report.

 

The accompanying Condensed Consolidated Financial Statements include the accounts of Veritec and its wholly ownedwholly-owned subsidiaries, Veritec Financial Systems, Inc., Tangible Payment Systems, Inc., and Public Bell, Inc. Inter-company transactions and balances were eliminated in consolidation.

 

GOING CONCERN

 

The accompanying Condensed Consolidated Financial Statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. During the nine monthsperiod ended March 31, 2019,2020, the Company incurred a net loss from operations of $640,101$366,021 and used cash in operating activities of $290,591,$262,664, and aton March 31, 2019,2020, the Company had a working capitalstockholders’ deficit of $4,940,396 and a stockholders’ deficiency of $5,095,396.$5,639,066. In addition, as of March 31, 2019,2020, the Company is delinquent in payment of $787,173$649,330 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, 20182019 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 be necessary if the Company is unable to continue as a going concern.

 

 9 

 

 

The Company believes it will require additional funds to continue its operations through fiscal 20192020 and to continue to develop its existing projects and plans to raise such funds by finding additional investors to purchase the Company’s securities, generating sufficient sales revenue, implementing dramatic cost reductions or any combination thereof. There is no assurance that the Company can be successful in raising such funds, generating the necessary sales, or reducing major costs. Further, if the Company is successful in raising such funds from sales of equity securities, the terms of these sales may cause significant dilution to existing holders of common stock. The Condensed Consolidated Financial Statements do not include any adjustments that may result from this uncertainty.

 

Use of Estimates

 

The preparation of Condensed Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Those estimates and assumptions include estimates for reserves of uncollectible accounts, analysis of impairments of long lived assets, accruals for potential liabilities, and assumptions used in valuing derivatives and stock-based compensation, and the valuation of deferred taxes.tax assets.

 

Revenue Recognition

 

Prior to January 1, 2018,Revenues for the Company recognized itsare classified into mobile banking technology revenue and management fee revenue.

The Company recognizes revenue in accordance with the Financial Accounting Standards Board'sBoard’s (“FASB”) Accounting Standards Codification (ASC) 605Revenue 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 we adopted ASC 606,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.

Mobile Banking Technology Revenue

The Company, has concluded thatas a merchant payment processor and a distributor, recognizes revenue from transaction fees charged to cardholders for the new guidance did not require any significant change touse of its revenue recognition processesissued mobile debit cards. The fees are recognized monthly after all cardholder transactions have been summarized and the implementation of ASC 606 did not have a material impact on the Company’s financial statements.reconciled with third party processors.

Other Revenue, Management Fee - Related Party

 

On December 31, 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 6). 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, 2020. The Company earns a fee of 35% of all revenues billed up to June 30, 2020, and recognizes management fee revenue as services are performed. 

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Fair Value of Financial Instruments

 

FairThe Company determines the fair value measurements adopted by the Company areof its assets and liabilities based on the authoritative guidance provided by the Financial Accounting Standards Board (“FASB”) which defines fair value as theexchange price in U.S. dollars that would be received to sellfor 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 aton the measurement date. FASB authoritative guidance establishesValuation 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 prioritizes the inputs used in measuringfirst two are considered observable and the last unobservable, to measure fair value into three broad levels as follows: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.

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Inputs, other than the quoted prices in active markets that are observable either directly or indirectly.

Level 3 - Unobservable inputs based on the Company's assumptions.

The carrying amounts reported in the Condensed Consolidated Balance Sheet forof financial instruments such as cash, and cash equivalents, accounts receivable, accounts payable and currentaccrued liabilities, includingand notes payable and convertible notes, approximate theirthe related fair values becausedue to the short-term maturities of the short period of time between the origination of such instruments and their expected realization and their current market rates of interest.these instruments.

 

10

Net Income (Loss) per Common Share

 

Basic earnings (loss) per share are computed by dividing the net income (loss) applicable to Common Stockholders by the weighted average number of shares of Common Stock outstanding during the year. Diluted earnings (loss) per share is computed by dividing the net income (loss) applicable to Common Stockholders by the weighted average number of common shares outstanding plus the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued, using the treasury stock method. Potential common shares are excluded from the computation as their effect is antidilutive. 

 

For the periodperiods ended March 31, 20192020 and 2018,2019, the calculations of basic and diluted loss per share are the same because potential dilutive securities would have an anti-dilutive effect. At March 31, 2019, the Company’s Series H Preferred Stock, Convertible Notes Payable and Options were antidilutive because their exercise prices and conversion prices were out of the money.

 

As of March 31, 20192020 and 2018,2019, we excluded the outstanding securities summarized below, which entitle the holders thereof to acquire shares of common stock, from our calculation of earnings per share, as their effect would have been anti-dilutive.

 

 As of March 31, As of March 31,
 2019 2018 2020 2019
Series H Preferred Stock  10,000   10,000   10,000   10,000 
Convertible Notes Payable  20,496,700   19,017,287   21,413,712   20,496,700 
Options  3,650,000   2,500,000   3,650,000   3,650,000 
Total  24,156,700   21,527,287   25,073,712   24,156,700 

 

Concentrations

 

During the three and nine monthsmonth period ended March 31, 2020, the Company had one customer, a related party, that represented 86% and 80% of our revenues, respectively. During the three and nine month period ended March 31, 2019, the Company had one customer, a related party whichthat represented 60% of our revenues, one customer that represented 20% of our revenues, and one customer that represented 10% of our revenues. During the nine months ended March 31, 2018, the Company had one customer, a related party that represented 69%60% of its revenue, and one customer that represented 13% of its revenue.revenues, respectively. No other customer represented more than 10% of our revenues during the nine monthsperiod ended March 31, 2020 and 2019.

During the period ended March 31, 2020, and 2019, and 2018.all of the Company’s revenues were earned in the United States of America.

 

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 makerdecision-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: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 condensed consolidated financial statements

11

Stock-Based Compensation

The Company issues stock options and warrants, shares of common stock, and equity interests as share-based compensation to employees and non-employees. The Company accounts for its share-based compensation to employees in accordance with FASB ASC 718,Compensation – Stock Compensation. Stock-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the requisite service period.

In prior periods through June 30, 2019, the Company accounted for share-based compensation issued to non-employees and consultants in accordance with the provisions of FASB ASC 505-50,Equity - Based Payments to Non-Employees. Measurement of share-based payment transactions with non-employees is based on the fair value of whichever is more reliably measurable: (a) the goods or services received; or (b) the equity instruments issued. The final fair value of the share-based payment transaction is determined at the performance completion date. For interim periods, the fair value is estimated, and the percentage of completion is applied to that estimate to determine the cumulative expense recorded.

 

Recent Accounting Pronouncements

 

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 is in the process of evaluating theadopted ASU 2018-07 on July 1, 2019, which had no impact of Topic 842 on the Company’s financial statements and related disclosures thoughas the adoptionCompany does not have leases with terms longer than 12 months.

In June 2016, the FASB issued ASU No. 2016-13, Credit Losses - Measurement of Credit Losses on Financial Instruments (“ASC 326”). The standard significantly changes how entities will measure credit losses for most financial assets, including accounts and notes receivables. The standard will replace today’s “incurred loss” approach with an “expected loss” model, under which companies will recognize allowances based on expected rather than incurred losses. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is expected to result in an increase ineffective. As small business filer, the assetsstandard will be effective for us for interim and liabilities reflectedannual reporting periods beginning after December 15, 2022. The Company is currently assessing the impact of adopting this standard on the Company’s balance sheets.financial statements and related disclosures.

 

11

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’sCompany's present or future consolidated financial statements.

12

 

NOTE 2 – CONVERTIBLE NOTES AND NOTES PAYABLE

 

Convertible notes and notes payable-in defaultpayable

 

Convertible notes and notes payable includes principal and accrued interest and consists of the following at March 31, 20192020 and June 30, 2018:2019:

 

   March 31,
2019		 June 30,
2018
(a)Convertible notes (includes $182,506 of convertible notes in default) $221,672  $214,576 
(b)Notes payable-in default  400,793   387,684 
(c)Notes payable  10,014   —   
 Total notes-third parties $632,479  $602,260 
  March 31,
2020		 June 30,
2019
   (Unaudited)     
(a) Convertible notes ($18,186 and $184,506 in default) $58,812  $224,037 
(b) Notes payable (in default)  418,270   405,162 
(c) Notes payable  25,904   25,153 
Total notes-third parties $502,986  $654,352 

 

(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.

 

AtOn June 30, 2018,2019, convertible notes totaled $214,576.$224,037. During the nine monthsperiod ended March 31, 2019,2020, interest of $7,096$1,696 was added to principal leavingthe principal. In addition, the Company and one of the holders of the convertible notes agreed to extinguish a convertible note payable of $166,921 resulting in a gain on extinguishment (see Note 3), resulting in a balance owed of $221,672$58,812 at March 31, 2019. At2020. On March 31, 2019, $182,5062020, $18,186 of the convertible notes were in default and convertible at a conversion price of $0.30 per share into 608,35460,619 shares of the Company’s common stock. Certain of the amounts due are subject to a legal proceeding (see Note 6). The balance of $39,166$40,627 is due on demand and convertible at a conversion price of $0.08 per share into 489,572507,832 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.

 

AtOn June 30, 2018,2019, the notes totaled $387,684.$405,162. During the nine monthsperiod ended March 31, 2019,2020, interest of $13,109$13,108 was added to the principal, leaving aresulting in balance owed of $400,793 at$418,270 on March 31, 2019, which are in default. At2020. On March 31, 2019, $361,5092020, $376,987 of notes are secured by the Company’s intellectual property, and $39,284$41,283 of notes are unsecured.

 

(c) The note is dated March 18, 2019notes are unsecured and is unsecured, bearsbear interest at 4.0%of 4% per annum and iswere due on March 17, 2020.

On March 18,June 30, 2019, the Company issued an unsecured note payable for $10,000. Fromnotes totaled $25,153. During the date of issuance toperiod ended March 31, 2019,2020, interest of $14$751 was added to the principal, leavingresulting in a balance owed of $10,014 at$25,904 on March 31, 2019.2020. The notes are currently past due.

 

12

Convertible notes and notes payable-related partyparties

 

Notes payable-related partyparties includes principal and accrued interest and consists of the following at March 31, 20192020, and June 30, 2018:2019:

 

   March 31,
2019		 June 30,
2018
(a)Convertible notes-The Matthews Group $1,425,661  $1,344,782 
(b)Notes payable-The Matthews Group  1,748,283   1,384,088 
(c)Convertible notes-other related-in default  276,229   265,729 
 Total notes-related party $3,450,173  $2,994,599 
  March 31,
2020		 June 30,
2019
   (Unaudited)     
(a) Convertible notes-The Matthews Group $1,533,500  $1,452,621 
(b) Notes payable-The Matthews Group  2,397,452   1,914,618 
(c) Convertible notes-other related parties ($212,874 and $206,124 in default)  290,228   279,728 
Total notes-related parties $4,221,180  $3,646,967 

 

(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 5) and is owned 50% by Ms. Van Tran, the Company’s CEO, and 50% by Larry Johanns, a significant shareholder of the Company. AtOn June 30, 2018,2019, convertible notes due to The Matthews Group totaled $1,344,782.$1,452,621. During the nine monthsperiod ended March 31, 2019,2020, interest of $80,879 was added to the principal leavingresulting in a balance owedpayable of $1,425,661 at$1,533,500 on March 31, 2019. At2020. On March 31, 2019,2020, the notes are convertible at a conversion price of $0.08 per share into 17,820,76819,168,755 shares of the Company’s common stock.

 

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(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 5) dated December 31, 2015. AtOn June 30, 2018,2019, notes due to The Matthews Group totaled $1,384,088.$1,914,618. During the nine monthsperiod ended March 31, 2019, $253,7692020, $340,857 of notes payable were issued, interest of $110,426$141,977 was added to the principal, leavingresulting in a balance owed of $1,748,283$2,397,452 at March 31, 2019.2020.

 

(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$0.08 to $0.30, and bear interest at rates ranging from 8% to 10% per annum.

 

AtOn June 30, 2018,2019, convertible notes due to other related parties totaled $265,729.$279,728. During the nine monthsperiod ended March 31, 2019,2020, interest of $10,500 was added to the principal leavingresulting in a balance owed of $276,229 at$290,228 on March 31, 2019. At2020. On March 31, 2019, $203,8742020, $212,874 of the notes were due in 2010 and are in default, and the balance of $72,355$77,354 is due on demand. At March 31, 2019, $203,8742020, $212,874 of the notes are convertible at a conversion price of $0.30 per share into 679,581 shares of the Company’s common stock, $21,706 of the notes are convertible at a conversion price of $0.10 per share into 217,062709,581 shares of the Company’s common stock, and $50,649$77,354 of the notes are convertible at a conversion price of $0.08 per share into 633,098966,925 shares of the Company’s common stock.

NOTE 3 – GAIN ON EXTINGUISHMENT OF CONVERTIBLE NOTE PAYABLE

In May 2009, the Company issued a convertible note payable for $100,000. The note was unsecured, convertible into shares of the Company’s common stock at $0.30 per share, with interest at 8% per annum, and due November 15, 2010. The note was not paid when due and the Company went into default on the convertible note payable. The Company continued to accrue interest on the unpaid principal at 8% per annum, and repaid $10,000 principal in 2014.

On November 13, 2017, the noteholder filed a lawsuit in district court in Hennepin County, Minnesota asserting that the Company breached the terms of the promissory note. The noteholder sought repayment on the principal of the promissory note, in the amount of $100,000 less the $10,000 which the Company previously paid, plus interest, collection costs, and attorney’s fees. As of June 30, 2019, the Company had recorded a total of $166,921 for the convertible note payable and accrued interest due to the noteholder.

On July 10, 2019, the Company and the noteholder entered into a Settlement Agreement and Mutual Release. The Company and the noteholder agreed to generally discharge and forever release each other from future claims, to pay their own legal fees, and the convertible promissory note payable to the noteholder was discharged. As the Company was legally released from its obligation under the convertible note, the Company recorded a gain on extinguishment of the convertible note payable of $166,921 during the period ended March 31, 2020.

 

NOTE 34 - STOCKHOLDERS’ DEFICIENCY

AtOn March 31, 20192020, and June 30, 2018,2019, 145,000 shares of common stock to be issued with an aggregate value of $12,500 have not been issued and are reflected as common stock to be issued in the accompanying Condensed Consolidated Financial Statements.

 

During the period ended March 31, 2020, the Company issued 200,000 shares of common stock to a consultant, with a fair value of $10,000 at date of grant, which was recognized as compensation cost.

NOTE 4 – STOCK OPTIONSSummary of Stock Options

 

A summary of stock options as of March 31, 20192020, is as follows:

 

  Number of Shares Weighted - Average Exercise Price
Outstanding at June 30, 2018  2,500,000  $0.08 
Granted  1,150,000   0.03 
Forfeited  —    $—   
Outstanding at March 31, 2019  3,650,000  $0.06 
Exercisable at March 31, 2019  2,787,500  $0.07 

  Number of Shares Weighted Average Exercise Price
Outstanding at June 30, 2019  3,650,000  $0.06 
Granted  —     —   
Forfeited  —    $—   
Outstanding at March 31, 2020  3,650,000  $0.06 
Exercisable at March 31, 2020  3,650,000  $0.06 

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On January 10, 2020, the Company modified the term of a stock option originally granted to its Chief Executive Officer in February 2013 and due to expire in February 2020. The Company extended the expiration date of the stock option by an additional 24 months. Due to the modification, the Company recorded a charge of approximately $6,262 on the modification date to account for the incremental change in fair value of the stock option before and after the modification,which was recognized as compensation cost.

 

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 iswas being amortized over the vesting period of 12 months. The fair value ofDuring the stock options was calculated using the Black-Scholes option pricing model using the following assumptions – stock price of $0.03; exercise price of $0.03; expected life of 2 years; volatility of 121%; dividend rate of 0.0%three and discount rate of 2.63%.

13

The Company recorded compensation expense pursuant to authoritative guidance provided by the ASC Topic 718 –Stock Compensationfor the nine monthsmonth period ended March 31, 2020 and 2019, the Company recorded stock-based compensation expense of $5,894. No similar expense was recorded during the same prior year period.$0 and $10,606, and $5,322 and $5,894, respectively. As of March 31, 2019,2020, the Company hashad no outstanding unvested options with future compensation costs of $15,391, which will be recorded as compensation cost as the options vest over their remaining average vesting period of nine months.

costs. The outstanding and exercisable stock options had an intrinsic value of $34,500$23,000 and $8,625,$11,500, respectively, aton March 31, 2020, and June 30, 2019.

  

Additional information regarding options outstanding as of March 31, 20192020, is as follows:

 

Options Outstanding at
March 31, 2019		 Options Exercisable at
March 31, 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   5.73  $0.03   287,500  $0.03 
$0.08   2,500,000   0.86  $0.08   2,500,000  $0.08 
     3,650,000           2,787,500     

The weighted-average remaining contractual life of stock options outstanding and exercisable at March 31, 2019 is 1.58 years.

Options Outstanding at

March 31, 2020

 

Options Exercisable at

March 31, 2020

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   4.73  $0.03   1,150,000  $0.03 
$0.08   2,500,000   1.86  $0.08   2,500,000  $0.08 
     3,650,000           3,650,000     

 

NOTE 5 – 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)2).

   

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 securityhigh-security applications. On September 30,December 31, 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, 2019.2020. 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 earnsearned a fee of 20% of all revenues up to May 31, 2017, and 35% of all revenues from June 1, 2017up to June 30, 2019,2020, from the barcode technology operations. During the three and nine monthsmonth period ended March 31, 20192020 and 2018,2019, the Company recorded management fee revenue related to this agreement of $100,779 and $276,203, and $44,536 and $35,034, respectively and $137,052 and $208,527, 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 nine monthsperiod ended March 31, 20192020 and 2018,2019, cash flow loans of $253,769$340,857 and $359,044,$253,769, respectively, were made to the Company at 10% interest per annum and due on demand. AtOn March 31, 2019,2020, cash flow loans of $1,748,283$2,397,452 are due to The Matthews Group (see Note 2).

 

 1415 

 

 

Advances from Related Parties

 

From time to time, Ms. Van Tran, the Company’s CEO/Executive Chair, provides advances to finance the Company’s working capital requirements. As of March 31, 20192020, and June 30, 2018,2019, total advances to Ms. Van Tran amounted to $96,110,$121,835 and $100,360, respectively, and have been presented as accounts payable, related party on the accompanying Condensed 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.Tran, the Company’s CEO/Executive Chair. For the three and nine monthsmonth periods ended March 31, 2020 and 2019, and 2018, rentallease payments to Ms. Van Tran totaled $12,750 and $38,250, and $12,750 and $38,250, respectively.respectively, and are included in general and administrative expenses.

 

NOTE 6 – LEGAL PROCEEDINGSCOMMITMENTS AND CONTINGENCIES

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 Plaintiffs 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.  As of March 31, 2019,2020, the 500,000 shares have not been relinquished. When the Company receives the shares, it will record a cancellation of shares.

 

The outbreak of communicable diseases, such as a new virus known as the Coronavirus (COVID-19), could result in a widespread health crisis that could adversely affect general commercial activity and our business. An outbreak of communicable diseases in the region that we operate or regions from which our customers travel from or through, or the perception that such an outbreak could occur, and the measures taken by the governments of countries affected, including restricting air travel and other means of transportation, imposing quarantines and curfews and requiring the closure of our offices or other businesses, including office buildings, theatres, retail stores and other commercial venues, could adversely affect our business, financial condition or results of operations.

 1516 

 

 

ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Results of Operations – Three months Endedended March 31, 20192020, compared to March 31, 20182019

 

We had a net loss of $75,547 during$181,940 for the three monthsmonth period ended March 31, 2019, as2020, compared to a net loss of $250,103 during$214,958 for the three monthsmonth period ended March 31, 2018.2019.

 

Revenues

 

Details of revenues are as follows:

 

  Three months ended
March 31,		 Increase (Decrease)
  2019 2018 $ %
Mobile Banking Technology $26,604  $31,324  $(1,720)  (5.5)
Other revenue, management fee related party  44,536   35,034   9,502   27.1 
Total Revenues $74,140  $66,358  $7,782   11.7 
  

Three months ended

March 31,

 Increase (Decrease)
  2020 2019 $ %
Mobile banking technology $16,934  $29,604  $(12,670)  (42.8)
Other revenue, management fee - related party  100,779   44,536   56,243   126.3 
Total Revenues $117,713  $74,140  $43,573   58.8 

Mobile banking technology

 

Mobile Banking Technology

The Company is currently seeking a bank to sponsor its Prepaid Card programs (see Note 1 to Condensed Consolidated Financial Statements). Mobile Banking Technology revenues include products such as the Company’s Blinx On-Off™ prepaid toggle Card and its Open Loop/CloseClosed Loop System and Bio ID Card Platform. Mobile Banking Technology uses web-based mobile technology to offer financial cardholders the very best technology in conducting secure financial transactions in real time,real-time, protecting personal identity, and financial account security. Mobile Banking Technology revenues for the three monthsmonth period ended March 31, 2020, and 2019 were $16,934 and 2018$29,604, respectively. The decrease in Mobile Banking Technology revenues was $29,604due to both the conclusion of certain long-term contracts during the prior year and $31,324, respectively.the Company not having a bank to sponsor its mobile banking solutions since fiscal year 2016 (see Note 1 to Consolidated Financial Statements).

 

Other Revenue,revenue, management fee - related party

 

Effective October 1, 2015, the Company entered into a management services agreement with the Matthews Group for which the Company agreed to manage its previous barcode technology business, on behalf of the Matthews Group, from October 1, 2015 to July 31, 2018.June 30, 2020. Per the terms of the management services agreement, the Company earned 20% of all revenues through May 31, 2017, and 35% of all revenues through June 30, 2019.2020. For the three monthsmonth period ended March 31, 20192020 and 2018,2019, revenue earned from the management services agreement was $44,536$100,779 and $35,034,$44,536, respectively.

 

Cost of Sales

 

Cost of sales for the three monthsmonth period ended March 31, 2020 and 2019 totaled $52,876 and 2018 were comparable totaling $57,697, and $61,189, respectively.

Operating Expenses

General and administrative expenses for the three months ended March 31, 2019 and 2018 totaled $143,453 and $132,381, respectively. The increasedecrease in general and administrative expensesthe cost of sales was primarily from an increaseexpense reductions, including bank sponsor fees, associated with our decline in professional fees. 

Research and development expenses for the three months ended March 31, 2019 and 2018 totaled $12,403 and $0, respectively. The increase in research and development expenses was primarily due to the timing of when the expense was incurred compared to the same period of the prior year.

16

Other Income (Expenses)

During the three months ended March 31, 2018, the Company recognized expense related to the change in fair value of derivative liabilities that totaled $186,829. No similar activity occurred during the same current year period.

During the three months ended March 31, 2019 and 2018, interest expense, totaled $75,547 and $63,274, respectively. The increase was the result of increased notes payable balancesMobile Banking Technology revenues discussed above, as compared to the same period of the prior year.

 

Operating Expenses

Selling, general and administrative expenses for the three month period ended March 31, 2020 and 2019 totaled $162,325 and $143,451, respectively. The increase in general and administrative expenses was primarily due to increased legal and professional fees as compared to the same period of the prior year.

Research and development expenses for the three month period ended March 31, 2020 and 2019 totaled $0 and $12,403, respectively.

17

Other Income (Expenses)

Interest expense for the three month period ended March 31, 2020 and 2019, was $84,452 and $75,547, respectively. The increase was due to the increase in our notes payable balance.

Results of Operations – Nine months Endedended March 31, 20192020, compared to March 31, 20182019

 

We had a net loss of $640,101 during$366,021 for the nine monthsmonth period ended March 31, 2019, as2020, compared to a net incomeloss of $4,990 during$640,101 for the nine monthsmonth period ended March 31, 2018.2019.

 

Revenues

 

Details of revenues are as follows:

 

  Nine months ended
March 31,		 Increase (Decrease)
  2019 2018 $ %
Mobile Banking Technology $90,194  $92,441  $(2,247)  (2.4)
Other revenue, management fee related party  137,052   208,527   (71,475)  (34.3)
Total Revenues $227,246  $300,968  $(73,722)  (24.5)
  

Nine months ended

March 31,

 Increase (Decrease)
  2020 2019 $ %
Mobile banking technology $67,557  $90,194  $(22,637)  (25.1)
Other revenue, management fee - related party  276,203   137,052   139,151   101.5 
Total Revenues $343,760  $227,246  $116,514   51.3 

Mobile banking technology

 

Mobile Banking Technology

The Company is currently seeking a bank to sponsor its Prepaid Card programs (see Note 1 to Condensed Consolidated Financial Statements). Mobile Banking Technology revenues include products such as the Company’s Blinx On-Off™ prepaid toggle Card and its Open Loop/CloseClosed Loop System and Bio ID Card Platform. Mobile Banking Technology uses web-based mobile technology to offer financial cardholders the very best technology in conducting secure financial transactions in real time,real-time, protecting personal identity, and financial account security. Mobile Banking Technology revenues for the nine monthsmonth period ended March 31, 2020 and 2019 were $67,557 and 2018$90,194, respectively. The decrease in Mobile Banking Technology revenues was $90,194due to both the conclusion of certain long-term contracts during the prior year and $92,441, respectively.the Company not having a bank to sponsor its mobile banking solutions since fiscal year 2016 (see Note 1 to Consolidated Financial Statements).

 

Other Revenue,revenue, management fee - related party

 

Effective October 1, 2015, the Company entered into a management services agreement with the Matthews Group for which the Company agreed to manage its previous barcode technology business, on behalf of the Matthews Group, from October 1, 2015 to July 31, 2018.June 30, 2020. Per the terms of the management services agreement, the Company earned 20% of all revenues through May 31, 2017, and 35% of all revenues through June 30, 2019.2020. For the nine monthsmonth period ended March 31, 20192020 and 2018,2019, revenue earned from the management services agreement was $137,052$276,203 and $208,527,$137,052, respectively.

 

Cost of Sales

 

Cost of sales for the nine monthsmonth period ended March 31, 2020 and 2019 totaled $163,057 and 2018 totaled $175,869, and $168,305, respectively. The increasedecrease in the cost of sales was primarily from anexpense reductions, including bank sponsor fees, associated with our decline in Mobile Banking Technology revenues discussed above, as compared to the same period of the prior year.

Operating Expenses

Selling, general and administrative expenses for the nine month period ended March 31, 2020 and 2019 totaled $462,236 and $457,001, respectively. The increase in platform hosting relatedgeneral and administrative expenses was primarily due to increased legal and professional fees as compared to the same period of the prior year.

 

Operating Expenses

General and administrative expenses for the nine months ended March 31, 2019 and 2018 were comparable totaling $457,001 and $446,308, respectively.

Research and development expenses for the nine months ended March 31, 2019 and 2018 totaled $12,453 and $19,938, respectively. The decrease in research and development expenses was primarily from expense reductions implemented during the period while the Company seeks a bank to sponsor its Prepaid Card programs as discussed above. 

 1718 

 

 

Research and development expenses for the nine month period ended March 31, 2020 and 2019 totaled $0 and $12,453, respectively.

Other Income (Expenses)

 

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 (see Note 4 to the accompanying Condensed Consolidated Financial Statements). During the nine months ended December 31, 2018, the Company recognized income related to the change in fair value of derivative liabilities that totaled $519,582. No similar activity occurred during the same current year period.

During the nine monthsmonth period ended March 31, 2020, the Company recorded a gain on extinguishment of convertible note payable of $166,921.

Interest expense for the nine month period ended March 31, 2020 and 2019, was $251,409 and 2018, interest expense, totaled $222,024, respectively. The increase was due to the increase in our notes payable balance.

Liquidity and $181,009, respectively.Capital Resources

Our cash balance on March 31, 2020 increased to $169,305 as compared to $91,112 on June 30, 2019. The increase was the result of increased notes payable balances as compared to the same period of the prior year.

Capital Expenditures and Commitments

No capital purchases were made during the nine months ended March 31, 2019.

Liquidity

Our cash balance at March 31, 2019 decreased to $112,264 as compared to $139,086 at June 30, 2018. The decrease was the result of $290,591$262,664 in cash used in operating activities offset by $263,769$340,857 in cash provided by financing activities. Net cash used in operations during the nine monthsperiod ended March 31, 20192020, was $290,591$262,664, compared with $371,974$290,591 of net cash used in operations during the same period of the prior year. Cash used in operations during the nine monthsperiod ended March 31, 20192020, was primarily due tofrom our net loss of $366,021, and the gain on settlement and extinguishment of a promissory note payable of $166,921, and offset by and increase in the periodinterest accrued on notes payable of $640,101.$248,911, stock-based compensation expense of $16,332, common stock issued for services of $10,000, and general changes to our working capital accounts of $4,965. Net cash provided by financing activities of $263,769$340,857 during the nine monthsperiod ended March 31, 20192020, was due to proceeds received from notes payable. During the same period of the prior year, net cash provided by financing activities of $359,044$263,769 was from proceeds received from notes payable.

 

The accompanying Condensed Consolidated Financial Statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. During the nine monthsperiod ended March 31, 2019,2020, the Company incurred a loss from operations of $640,101$366,021 and used cash in operating activities of $290,591,$262,664, and aton March 31, 2019,2020, the Company had a working capital deficit of $4,730,760$5,484,066 and a stockholders’ deficiency of $4,940,396.$5,639,066. In addition, as of March 31, 2019,2020, the Company is delinquent in payment of $787,173$649,330 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, 20182019 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 be necessary if the Company is unable to continue as a going concern.

 

The Company believes its cash and forecasted cash flow from operations will not be sufficient to continue operations through fiscal 20192020 without continued external investment. The Company believes it will require additional funds to continue its operations through fiscal 20192020 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 Company has traditionally been dependent on The Matthews Group, LLC, a related party, for its financial support. The Matthews Group is owned 50% by Van Tran, the Company’s CEO/Executive Chair and a director, and 50% by Lawrence J. Johanns, a significant Company stockholder.

 

The outbreak of communicable diseases, such as a new virus known as the Coronavirus (COVID-19), could result in a widespread health crisis that could adversely affect general commercial activity and our business. An outbreak of communicable diseases in the region that we operate or regions from which our customers travel from or through, or the perception that such an outbreak could occur, and the measures taken by the governments of countries affected, including restricting air travel and other means of transportation, imposing quarantines and curfews and requiring the closure of our offices or other businesses, including office buildings, theatres, retail stores and other commercial venues, could adversely affect our business, financial condition or results of operations.

 1819 

 

Convertible notes and notes payable-in defaultpayable

 

Convertible notes and notes payable includes principal and accrued interest and consists of the following at March 31, 20192020 and June 30, 2018:2019:

 

   March 31,
2019		 June 30,
2018
(a)Convertible notes (includes $182,506 of convertible notes in default) $221,672  $214,576 
(b)Notes payable-in default  400,793   387,684 
(c)Notes payable  10,014   —   
 Total notes-third parties $632,479  $602,260 
  

March 31,

2020

 June 30,
2019
   (Unaudited)     
(a) Convertible notes ($18,186 and $184,506 in default) $58,812  $224,037 
(b) Notes payable (in default)  418,270   405,162 
(c) Notes payable  25,904   25,153 
Total notes-third parties $502,986  $654,352 

 

(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, 2018, convertible notes totaled $214,576. During the nine months ended March 31, 2019, interest of $7,096 was added to principal leaving a balance owed of $221,672 at March 31, 2019. At March 31, 2019, $182,506 of the convertible notes were in default, and convertible at a conversion price of $0.30 per share into 608,354 shares of the Company’s common stock. Certain of the amounts due are subject to a legal proceeding (see Note 6). The balance of $39,166 is due on demand and convertible at a conversion price of $0.08 per share into 489,572 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, 2018, the(c) The notes totaled $387,684. During the nine months ended March 31, 2019,are unsecured and bear interest of $13,109 was added to principal leaving a balance owed of $400,793 at March 31, 2019, which are in default. At March 31, 2019, $361,509 of notes are secured by the Company’s intellectual property and $39,284 of notes are unsecured.

(c) The note is dated March 18, 2019 and is unsecured, bears interest at 4.0%4% per annum and is due on March 17, 2020.

On March 18, 2019, the Company issued an unsecured note payable for $10,000. From the date of issuance to March 31, 2019, interest of $14 was added to principal leaving a balance owed of $10,014 at March 31, 2019.

 

Convertible notes and notes payable-related partyparties

 

Notes payable-related partyparties includes principal and accrued interest and consists of the following at March 31, 20192020, and June 30, 2018:2019:

 

   March 31,
2019		 June 30,
2018
(a)Convertible notes-The Matthews Group $1,425,661  $1,344,782 
(b)Notes payable-The Matthews Group  1,748,283   1,384,088 
(c)Convertible notes-other related-in default  276,229   265,729 
 Total notes-related party $3,450,173  $2,994,599 
  

March 31,

2020

 June 30,
2019
   (Unaudited)     
(a) Convertible notes-The Matthews Group $1,533,500  $1,452,621 
(b) Notes payable-The Matthews Group  2,397,452   1,914,618 
(c) Convertible notes-other related parties ($212,874 and $206,124 in default)  290,228   279,728 
Total notes-related parties $4,221,179  $3,646,967 

 

(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 5) 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, 2018, convertible notes due to The Matthews Group totaled $1,344,782. During the nine months ended March 31, 2019, interest of $80,879 was added to principal leaving a balance owed of $1,425,661 at March 31, 2019. At March 31, 2019, the notes are convertible at a conversion price of $0.08 per share into 17,820,768 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 5) dated December 31, 2015. At June 30, 2018, notes due to The Matthews Group totaled $1,384,088. During the nine months ended March 31, 2019, $253,769 of notes payable were issued, interest of $110,426 was added to principal, leaving a balance owed of $1,748,283 at March 31, 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 $0.10$0.08 to $0.30, and bear interest at rates ranging from 8% to 10% per annum.

19

At June 30, 2018, convertible notes due other related parties totaled $265,729. During the nine months ended March 31, 2019, interest of $10,500 was added to principal leaving a balance owed of $276,229 at March 31, 2019. At March 31, 2019, $203,874 of the notes were due in 2010 and are in default, and the balance of $72,355 is due on demand. At March 31, 2019, $203,874 of the notes are convertible at a conversion price of $0.30 per share into 679,581 shares of the Company’s common stock, $21,706 of the notes are convertible at a conversion price of $0.10 per share into 217,062 shares of the Company’s common stock, and $50,649 of the notes are convertible at a conversion price of $0.08 per share into 633,098 shares of the Company’s common stock.

Commitments and Contractual Obligations

The Company has one annual lease commitment of $51,000 for the corporate office building, which is leased from Ms. Tran, our chief executive officer, with an expiration date of March 30, 2019. The commitment is for the corporate offices at 2445 Winnetka Avenue North, Golden Valley, Minnesota. The total amount of the remaining lease commitment is $12,750 at March 31, 2019.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements.

 

20

Critical Accounting Policies

 

Stock-Based CompensationRevenue Recognition

 

The Company periodically issues stock options and warrants to employees and non-employeesrecognizes revenue 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 theaccordance with Financial Accounting Standards Board whereBoard’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 valuetransfer of goods or services to customers at the awardamount 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 measured on the date of grant and recognized over the vesting period.satisfied. The Company accountsonly 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 stock option and stock warrant grantsthe services it transfers to non-employees in accordance with the authoritative guidance of the Financial Accounting Standards Board 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.its clients.

 

Revenue Recognition

Revenues for the Company are classified into mobile banking technology and management fee revenue.

a. 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.

 

Prior to the year ended June 30, 2016, the Company entered into certain long term agreements to provide application development and support. Some customers paid the agreement in full at signing and the Company recorded the receipt of payment as deferred revenue. The Company records revenue relating to these agreements on a pro-rata basis over the term of the agreement and reduces its deferred revenue balance accordingly.

20

b.Other Revenue, Management Fee Revenue- Related Party

 

On September 30,December 31, 2015, the Company sold all of its assets of its Barcode Technology, which was comprised solely of its intellectual property, to The Matthews Group, anda related party (see Note 6). The Company subsequently 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, 2019.2020. The Company earnsearned 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. 

Stock-Based Compensation

The Company issues stock options and warrants, shares of common stock, and equity interests as share-based compensation to employees and non-employees. The Company accounts for its share-based compensation to employees in accordance with FASB ASC 718,Compensation – Stock Compensation. Stock-based compensation cost is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the requisite service period.

In prior periods through December 31, 2018, the Company accounted for share-based compensation issued to non-employees and consultants in accordance with the provisions of FASB ASC 505-50,Equity - Based Payments to Non-Employees. Measurement of share-based payment transactions with non-employees is based on the fair value of whichever is more reliably measurable: (a) the goods or services received; or (b) the equity instruments issued. The final fair value of the share-based payment transaction is determined at the performance completion date. For interim periods, the fair value is estimated, and the percentage of completion is applied to that estimate to determine the cumulative expense recorded.

In June 2018, the FASB issued ASU No. 2018-07,Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. The guidance was issued to simplify the accounting for share-based transactions by expanding the scope of Topic 718 from only being applicable to share-based payments to employees to also include share-based payment transactions for acquiring goods and services from nonemployees. As a result, nonemployee share-based transactions will be measured by estimating the fair value of the equity instruments at the grant date, taking into consideration the probability of satisfying performance conditions. The Company adopted ASU 2018-07 on July 1, 2019. The adoption of the standard did not have a material impact on our financial statements.

21

 

Recently Issued Accounting Standards

 

See Note 1 of the Condensed Consolidated Financial Statements for a discussion of recently issued accounting standards.

 

ITEM 3 –-- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

A smaller reporting company is not required to provide the information required by this Item 3.

ITEM 4 –-- CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures.

 

Our management, with the participation of our chief executive officer and our chief financial officer, carried out an evaluation of the effectiveness of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 (the “Exchange Act”) Rules 13a-15(e) and 15-d-15(e)) as of the end of the period covered by this report (the “Evaluation Date”).  Based upon that evaluation, our chief executive officer and our chief financial officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were not effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate to allow timely decisions regarding required disclosure.  As of March 31, 2019,2020, our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses in our internal control over financial reporting described in our Form 10-K aton June 30, 2018.2019.

 

Changes in Internal Control over Financial Reporting.

 

In our Form 10-K aton June 30, 2018,2019, we identified certain matters that constitute material weaknesses (as defined under the Public Company Accounting Oversight Board Auditing Standard No. 2) in our internal control over financial reporting as discussed on Management’s Report on Internal Control Over Financial Reporting.  We are undergoing ongoing evaluation and improvements in our internal control over financial reporting.  Regarding our identified weaknesses, we have performed the following remediation efforts:

 

We have assigned our audit committee with oversight responsibilities.

 

Our financial statements, periodic reports filed pursuant to the Securities Exchange Act of 1934, as amended, our monthly bank statements and imaged checks are now continuously reviewed by our chief financial officer and chief executive officer.

 

All significant contracts are now being reviewed and approved by our board of directors in conjunction with the chief executive officer.

 

There was no other change in our internal control over financial reporting that occurred during the period covered by this report that has materially affected or is reasonably likely to materially affect, our internal control over financial reporting.


 2122 

 

 

PART II

 

ITEM 1 –- LEGAL PROCEEDINGS

 

On or about November 13, 2017, David A. Badhwa and Denise a Badhwa (collectively “Plaintiffs”noteholder (“Plaintiff”) filed a lawsuit in district court in Hennepin County, Minnesota asserting that the Company breached the terms of a promissory note. Plaintiffs seekPlaintiff sought repayment on the principal of the promissory note, in the amount of $100,000, $10,000 of which PlaintiffsPlaintiff 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, Plaintiffsfrom Plaintiff, the Plaintiff sought an award or settlement in the amount of $162,990. If Plaintiffs prevail onAs 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 Plaintiff entered into a Settlement Agreement and Mutual Release, whereas, both the Company and the Plaintiff agreed to generally discharge and forever release each other from future claims, to pay 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’sown legal fees, incurred by Plaintiffs in seeking payment onand the promissory note in an amount determined bypayable to 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 resolvePlaintiff was discharged. During the claims in dispute. Management hasthree months ended March 31, 2020, the Company recorded a liability related to this proceeding that it feels is adequate.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 March 31,June 30, 2019, the 500,000 shares have not been relinquished. When the Company receives the shares, it will record a cancellation of shares.

 

ITEM 1A –- RISK FACTORS

 

A smaller reporting company is not required to provide the information required by this Item.

 

ITEM 2 –- UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3 –- DEFAULTS UPON SENIOR SECURITIES

 

The Company is in default on its various notes payable totaling $787,173$649,330 representing principal and accrued interest as of March 31, 2019.2020.

 

ITEM 4 –- MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5 –- OTHER INFORMATION

 

Not applicable.

 

ITEM 6 –- EXHIBITS

 

31.1Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.1

The following financial information from Veritec, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 20192020, formatted in XBRL: (i) Condensed Consolidated Balance Sheets at March 31, 20192020 and June 30, 2018;2019; (ii) Condensed Consolidated Statements of Operations for the three and nine months ended March 31, 20192020 and 2018;2019; (iii) Condensed Consolidated Statement of Stockholders’ Deficit as at March 31, 2019;2020; (iv) Condensed Consolidated Statements of Cash Flows for the nine months ended March 31, 20192020 and 2018;2019; (v) Notes to the Condensed Consolidated Financial Statements.

 

**The certifications attached as Exhibits 32.1 and 32.2 accompany the Quarterly on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed “filed” by Veritec, Inc. for purposes of Section 18 of the Securities Exchange Act.

 

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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.
   
May 10, 20194, 2020By:/s/ Van Tran
  Van Tran
  Chief Executive Officer
  (Principal Executive Officer)

 

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