This Management's Discussion and Analysis of Financial Condition and Results of
Operations includes a number of forward-looking statements that reflect
Management's current views with respect to future events and financial
performance. You can identify these statements by forward-looking words such as
"may," "will," "expect," "anticipate," "believe," "estimate" and "continue," or
similar words. Those statements include statements regarding the intent, belief
or current expectations of us and members of our management team as well as the
assumptions on which such statements are based. Prospective investors are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve risk and uncertainties, and that actual results may
differ materially from those contemplated by such forward-looking statements.
Readers are urged to carefully review and consider the various disclosures made
by us in this report and in our other reports filed with the Securities and
Exchange Commission. Important factors currently known to Management could cause
actual results to differ materially from those in forward-looking statements. We
undertake no obligation to update or revise forward-looking statements to
reflect changed assumptions, the occurrence of unanticipated events or changes
in the future operating results over time. We believe that our assumptions are
based upon reasonable data derived from and known about our business and
operations. No assurances are made that actual results of operations or the
results of our future activities will not differ materially from our
assumptions. Factors that could cause differences include, but are not limited
to, expected market demand for our products, fluctuations in pricing for
materials, and competition.
Business Overview
Veritec, Inc. has the exclusive license to market and sell the highly secure 2D
barcode technologies for verification and identification. Currently, Veritec
licenses the 2D barcode technology to semiconductor, pharmaceutical, and liquid
crystal display giants to use in large automation factories.
We believe our technology provides a solution for the current marketplace's
interest for COVID-19 related identification cards. Our new BIO-ID and Covid
Passport Cards will utilize our secure verification technology to provide
travelers with a highly secure digital method of identification and
verification. Our cards have two identifiers: static unchangeable information
including a facial image and private personal data are stored in a proprietary
2-D barcode. Changeable data such as a Covid-19 vaccine or Covid-19 test, date
and time or additional information are stored in an NFC chip embedded inside the
card.
On March 12, 2021, the Company entered into a strategic partnership agreement
with Woman's Football League Association ("WFLA"), whereas the Company is the
exclusive technology provider of WFLA. The Parties agreed that WFLA will
purchase and promote Veritec's own line of private label BIO-ID and Prepaid
cards exclusively to WFLA's players, vendors, and clients. The parties agreed to
work together in sales and marketing to market secure ID cards, financial cards,
payment processing, financial services, specializing in the cross-border
transactions between countries, international card-to-card money transfer
systems, and stored value cards, which is targeted for the minority Hispanic and
Asian immigrant, unbanked and money transfer market. WFLA agreed to encourage
its vendors and partners, to interface with Veritec's technologies including its
fingerprint technology and security features for Bio Identification and stored
value cards. WFLA has also agreed to apply for special card programs with the
Company's technologies to be marketed, together with Veritec, to Mexico,
Indonesia, Vietnam, and other markets.
On March 19, 2021, the Company entered into a strategic partnership agreement
with Global Telecare Inc. ("Global Telecare"), a telemedicine and service
provider to the Asian Community in Orange County, Garden Grove California,
whereas the Company is the exclusive technology provider of Global Telecare to
support its Medical Wellness ID Card Program. The Parties agreed that Global
Telecare will purchase and promote Veritec's own line of private label BIO-ID
and Prepaid cards exclusively and to provide Veritec's technologies to Global
Telecare's vendors and clients. The parties agreed to work together in sales and
marketing to market secure ID cards, financial cards, payment processing,
financial services, specializing in the cross-border transactions between
countries, international card-to-card money transfer systems, and stored value
cards, which is targeted for the minority Hispanic and Asian immigrant, unbanked
and money transfer market.
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Results of Operations - Three months ended March 31, 2021, compared to March 31,
2020
We had a net loss of $268,000 in the three months ended March 31, 2021, compared
to a net loss of $182,000 for the three months ended March 31, 2020.
Revenues
Details of revenues are as follows:
Three months ended
March 31, Increase (Decrease)
2021 2020 $ %
Mobile banking technology $ 24,000 $ 17,000 $ 7,000 41.2
Other revenue, management fee -
related party 52,000 101,000 (49,000 ) (48.5 )
Total Revenues $ 76,000 $ 118,000 $ (42,000 ) (35.6 )
• Mobile banking technology
Mobile Banking Technology revenues include products such as the Company's Blinx
On-Off™ prepaid toggle Card and its Open Loop/Closed 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, protecting personal identity, and financial account
security. Mobile Banking Technology revenues for the three months ended March
31, 2021, and 2020 were $24,000 and $17,000, respectively.
• Other 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 June 30, 2021. Per the terms of the management services
agreement, the Company earned a fee of 20% of barcode technology operations
revenues through May 31, 2017. Subsequent to May 31, 2017 and up to June 30,
2021, The Matthews Group earns a fee of 35% from the barcode technology
operations. For the three months ended March 31, 2021 and 2020, revenue earned
from the management services agreement was $52,000 and $101,000, respectively.
Cost of Sales
Cost of sales for the three months ended March 31, 2021 and 2020 totaled $60,000
and $53,000, respectively.
Operating Expenses
Selling, general and administrative expenses for the three months ended March
31, 2021 and 2020 totaled $184,000 and $163,000, respectively. The increase in
selling, general and administrative expenses was primarily due to increased
professional fees as compared to the same period of the prior year.
Other Income (Expenses)
Interest expense for the three months ended March 31, 2021 and 2020, was
$100,000 and $84,000, respectively. The increase was due to the increase in our
notes payable balance.
Results of Operations - Nine months ended March 31, 2021, compared to March 31,
2020
We had a net loss of $806,000 for the nine months ended March 31, 2021, compared
to a net loss of $366,000 for the nine months ended March 31, 2020.
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Revenues
Details of revenues are as follows:
Nine months ended
March 31, Increase (Decrease)
2021 2020 $ %
Mobile banking technology $ 70,000 $ 68,000 $ 2,000 2.9
Other revenue, management fee -
related party 219,000 276,000 (57,000 ) (20.7 )
Total Revenues $ 289,000 $ 344,000 $ (55,000 ) (16.0 )
• Mobile banking technology
Mobile Banking Technology revenues include products such as the Company's Blinx
On-Off™ prepaid toggle Card and its Open Loop/Closed 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, protecting personal identity, and financial account
security. Mobile Banking Technology revenues for the nine month period ended
March 31, 2021, and 2020 were $70,000 and $68,000, respectively.
• Other 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 June 30, 2021. Per the terms of the management services
agreement, the Company earned a fee of 20% of barcode technology operations
revenues through May 31, 2017. Subsequent to May 31, 2017 and up to June 30,
2021, The Matthews Group earns a fee of 35% from the barcode technology
operations. For the nine month period ended March 31, 2021 and 2020, revenue
earned from the management services agreement was $219,000 and $276,000,
respectively.
Cost of Sales
Cost of sales for the nine month period ended March 31, 2021 and 2020 totaled
$171,000 and $163,000, respectively.
Operating Expenses
Selling, general and administrative expenses for the nine month period ended
March 31, 2021 and 2020 totaled $632,000 and $463,000, respectively. The
increase in selling, general and administrative expenses was primarily due to
property taxes related to our office lease of $67,000, which did not occur in
the prior year period, and increased professional fees as compared to the same
period of the prior year.
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. During the nine month period ended March 31,
2020, the Company recorded a gain on extinguishment of convertible note payable
of $167,000.
Interest expense for the nine month period ended March 31, 2021 and 2020, was
$292,000 and $251,000, respectively. The increase was due to the increase in our
notes payable balance.
19
Liquidity and Capital Resources
Our cash balance on March 31, 2021 decreased to $216,000 as compared to $228,000
on June 30, 2020. The decrease was the result of $496,000 in cash used in
operating activities offset by $484,000 in cash provided by financing
activities. Net cash used in operations during the nine months ended March 31,
2021, was $496,000, compared with $263,000 of net cash used in operations during
the same period of the prior year. Cash used in operations during the nine month
period ended March 31, 2021, was primarily from our net loss of $806,000, offset
by an increase in interest accrued on notes payable of $292,000, stock based
compensation expense of $10,000, a decrease in customer deposits of $16,000, and
general changes to our working capital accounts of $24,000. Net cash provided by
financing activities of $484,000 during the nine month period ended March 31,
2021, was due to proceeds received from notes payable. During the same period of
the prior year, net cash provided by financing activities of $341,000 was from
proceeds received from notes payable.
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 period ended March 31, 2021, the Company incurred a net loss of
$806,000 and used cash in operating activities of $496,000, and at March 31,
2021, the Company had a stockholders' deficiency of $6,645,000. In addition, as
of March 31, 2021, the Company is delinquent in payment of $704,000 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, 2020 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 its cash and forecasted cash flow from operations will not
be sufficient to continue operations through fiscal 2021 without continued
external investment. The Company believes it will require additional funds to
continue its operations through fiscal 2021 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.
Convertible notes and notes payable
Notes payable includes principal and accrued interest and consists of the
following at March 31, 2021 and June 30, 2020:
March 31, June 30,
2021 2020
(a) Unsecured convertible notes ($19,000 and
$18,000 in default) $ 61,000 $ 59,000
(b) Notes payable (in default) 436,000 423,000
(c) Notes payable (in default) 27,000 26,000
Total notes-third parties $ 524,000 $ 508,000(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.
20
At June 30, 2020, convertible notes totaled $59,000. During the period ended
March 31, 2021, interest of $2,000 was added to the principal, resulting in a
balance owed of $61,000 at March 31, 2021. On March 31, 2021, $19,000 of the
convertible notes were in default and convertible at a conversion price of $0.30
per share into 63,286 shares of the Company's common stock. The balance of
$42,000 is due on demand and convertible at a conversion price of $0.08 per
share into 526,093 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, 2020, the notes totaled $423,000. During the period ended March 31,
2021, interest of $13,000 was added to principal resulting in a balance owed of
$436,000 at March 31, 2021. At March 31, 2021, $394,000 of notes are secured by
the Company's intellectual property and $42,000 of notes are unsecured.
(c) The notes are unsecured and bear interest of 4% per annum and were due on
March 17, 2020, and are in default.
At June 30, 2020, the notes totaled $26,000. During the period ended March 31,
2021, interest of $1,000 was added to principal resulting in a balance owed of
$27,000 at March 31, 2021.
Convertible notes and notes payable-related parties
Notes payable-related parties includes principal and accrued interest and
consists of the following at March 31, 2021 and June 30, 2020:
March 31, June 30,
2021 2020
(a) Convertible notes-The Matthews Group $ 1,712,000 $ 1,560,000
(b) Notes payable-The Matthews Group 3,169,000 2,630,000
(c) Convertible notes-other related parties
($222,000 and $215,000 in default) 304,000 294,000
Total notes-related parties $ 5,185,000 $ 4,484,000(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 and is owned 50% by Ms. Van Tran, the
Company's CEO/Executive Chair and a director, and 50% by Larry Johanns, a
significant shareholder of the Company. At June 30, 2020, convertible notes due
to The Matthews Group totaled $1,560,000. During the period ended March 31,
2021, $67,000 of notes payable were issued and interest of $85,000 was added to
principal, resulting in a balance owed of $1,712,000 at March 31, 2021. At March
31, 2021, the notes are convertible at a conversion price of $0.08 per share
into 21,400,281 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 dated December 31, 2015. At June 30, 2020, notes due to The
Matthews Group totaled $2,630,000. During the period ended March 31, 2021,
$358,000 of notes payable were issued and interest of $181,000 was added to
principal, resulting in a balance owed of $3,169,000 at March 31, 2021.
(c) The notes are due to a current and a former director, are unsecured,
convertible into common stock at per share amounts ranging from $0.08 to $0.30,
and bear interest at rates ranging from 8% to 10% per annum.
At June 30, 2020, convertible notes due to other related parties totaled
$294,000. During the period ended March 31, 2021, interest of $10,000 was added
to principal resulting in a balance owed of $304,000 at March 31, 2021. At March
31, 2021, $222,000 of the notes were due in 2010 and are in default, and the
balance of $82,000 is due on demand. At March 31, 2021, $222,000 of the notes
are convertible at a conversion price of $0.30 per share into 739,581 shares of
the Company's common stock, and $82,000 of the notes are convertible at a
conversion price of $0.08 per share into 1,029,425 shares of the Company's
common stock.
21
Government Assistance Loan Payable
On March 23, 2021, the Company was granted a loan for $59,000 (the "PPP loan")
from Community Federal Savings Bank, pursuant to the Paycheck Protection Program
(the "PPP") under the CARES Act.
The PPP loan matures on March 23, 2026, bear interest at a rate of 1% per annum,
is unsecured and guaranteed by the U.S. Small Business Administration (SBA). The
PPP loan is payable monthly commencing 10 months after the end of the covered
period, which ends in September 2021. In accordance with the PPP Flexibility
Act, if the Company applies for loan forgiveness within 10 months after the end
of the covered period, then no payments are due until the SBA remits payment of
a forgiveness amount or determines that no forgiveness is authorized. If the
Company does not submit a request for forgiveness within 10 months after the end
of the covered period, the Company will begin making payments on the PPP loan.
Funds from the PPP loan may only be used for qualifying expenses as described in
the CARES Act, including qualifying payroll costs, qualifying group health care
benefits, qualifying rent and debt obligations, and qualifying utilities. The
Company intends to use the entire loan amount for qualifying expenses. Under the
terms of the PPP, certain amounts of the loan may be forgiven if they are used
for qualifying expenses. The Company intends to apply for forgiveness of the PPP
loan with respect to these qualifying expenses, however, we cannot assure that
such forgiveness of any portion of the PPP loan will occur. As for the potential
loan forgiveness, once the PPP loan is, in part or wholly, forgiven and a legal
release is received, the liability would be reduced by the amount forgiven and a
gain on extinguishment would be recorded. The terms of the PPP loan provide for
customary events of default including, among other things, payment defaults,
breach of representations and warranties, and insolvency events.
Commitments and Contractual Obligations
The Company leases its corporate office building from Ms. Tran, our chief
executive officer, on a month-to-month basis, for $4,000 per month. The
corporate office is located at 2445 Winnetka Avenue North, Golden Valley,
Minnesota.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Critical Accounting Policies and Estimates
Management's discussion and analysis of our financial condition and results of
operations are based on our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires management to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an ongoing basis, management evaluates its estimates, including
those related to impairment of long-lived assets, including finite lived
intangible assets, accrued liabilities, fair value of warrant derivatives and
certain expenses. We base our estimates on historical experience and on various
other assumptions that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ materially from these estimates under different
assumptions or conditions.
Our significant accounting policies are more fully described in Note 1 to our
financial statements. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues, and expenses, and the related
disclosures of contingent assets and liabilities. Actual results could differ
from those estimates under different assumptions or conditions.
22
Stock-Based Compensation
The Company periodically issues stock-based compensation to officers, directors,
contractors and consultants for services rendered. Such issuances vest and
expire according to terms established at the issuance date.
Stock-based payments to officers, directors, employees, and for acquiring goods
and services from nonemployees, which include grants of employee stock options,
are recognized in the financial statements based on their fair values in
accordance with Topic 718. Stock option grants, which are generally time vested,
will be measured at the grant date fair value and charged to operations on a
straight-line basis over the vesting period. The fair value of stock options is
determined utilizing the Black-Scholes option-pricing model, which is affected
by several variables, including the risk-free interest rate, the expected
dividend yield, the expected life of the equity award, the exercise price of the
stock option as compared to the fair market value of the common stock on the
grant date and the estimated volatility of the common stock over the term of the
equity award.
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.
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.
b. Other revenue, management fee - related party
On December 31, 2015, the Company sold all of its assets of its Barcode
Technology comprised solely of its intellectual property to The Matthews Group
and 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, 2021. The Company earned a fee of 35% of all
revenues billed up to June 30, 2021.
Recently Issued Accounting Standards
See Footnote 1 of consolidated financial statements for a discussion of recently
issued accounting standards.
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VERITEC, INC. 
