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    VRTC   US9234373051

VERITEC, INC.

(VRTC)
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VERITEC : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

01/28/2021 | 12:38pm EDT

Results of Operations - Three months ended December 31, 2020, compared to December 31, 2019

We had a net loss of $213,000 in the three months ended December 31, 2020, compared to a net loss of $214,000 for the three months ended December 31, 2019.



Revenues


Details of revenues are as follows:



                                         Three months ended
                                            December 31,                 Increase (Decrease)
                                        2020            2019              $               %
Mobile banking technology           $   22,000      $   26,000      $    (4,000 )         (15.4 )
Other revenue, management fee -
related party                          111,000          46,000           65,000           141.3
Total Revenues                      $  133,000      $   72,000      $    61,000            84.7




  • 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 December 31, 2020, and 2019 were $22,000 and $26,000, respectively. The decrease in Mobile Banking Technology revenues was due to both the conclusion of certain long-term contracts during the prior year and 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, 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 December 31, 2020 and 2019, revenue earned from the management services agreement was $111,000 and $46,000, respectively. During the three months ended December 31, 2020, The Matthews Group received customer orders which were previously delayed due to the economic uncertainty related to COVID-19. The severity of the impact of the COVID-19 pandemic on the Company's business will continue to depend on a number of factors, including, but not limited to, the duration and severity of the pandemic and the extent and severity of the impact on the Company's customers, service providers and suppliers, all of which are uncertain and cannot be predicted.




Cost of Sales



Cost of sales for the three months ended December 31, 2020 and 2019 totaled $55,000 and $55,000, respectively.



Operating Expenses


Selling, general and administrative expenses for the three months ended December 31, 2020 and 2019 totaled $192,000 and $144,000, 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.



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Other Income (Expenses)


Interest expense for the three months ended December 31, 2020 and 2019, was $99,000 and $87,000, respectively. The increase was due to the increase in our notes payable balance.

Results of Operations - Six months ended December 31, 2020, compared to December 31, 2019

We had a net loss of $538,000 for the six months ended December 31, 2020, compared to a net loss of $184,000 for the six months ended December 31, 2019.



Revenues


Details of revenues are as follows:



                                          Six months ended
                                            December 31,                 Increase (Decrease)
                                        2020            2019              $                %
Mobile banking technology           $   46,000      $   51,000      $     (5,000 )          (9.8 )
Other revenue, management fee -
related party                          167,000         175,000            (8,000 )          (4.6 )
Total Revenues                      $  213,000      $  226,000      $    (13,000 )          (5.8 )




  • 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 six month period ended December 31, 2020, and 2019 were $46,000 and $51,000, respectively. The decrease in Mobile Banking Technology revenues was due to both the conclusion of certain long-term contracts during the prior year and 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, 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 six month period ended December 31, 2020 and 2019, revenue earned from the management services agreement was $167,000 and $175,000, respectively.




Cost of Sales



Cost of sales for the six month period ended December 31, 2020 and 2019 totaled $111,000 and $110,000, respectively.



Operating Expenses


Selling, general and administrative expenses for the six month period ended December 31, 2020 and 2019 totaled $448,000 and $300,000, 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.



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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 six months ended December 31, 2019, the Company recorded a gain on extinguishment of convertible note payable of $167,000.

Interest expense for the six month period ended December 31, 2020 and 2019, was $192,000 and $167,000, respectively. The increase was due to the increase in our notes payable balance.

Liquidity and Capital Resources

Our cash balance on December 31, 2020 decreased to $189,000 as compared to $228,000 on June 30, 2020. The decrease was the result of $375,000 in cash used in operating activities offset by $336,000 in cash provided by financing activities. Net cash used in operations during the six months ended December 31, 2020, was $375,000, compared with $206,000 of net cash used in operations during the same period of the prior year. Cash used in operations during the six month period ended December 31, 2020, was primarily from our net loss of $538,000, offset by an increase in interest accrued on notes payable of $192,000, a decrease in customer deposits of $41,000, and general changes to our working capital accounts of $12,000. Net cash provided by financing activities of $336,000 during the six month period ended December 31, 2020, was due to proceeds received from notes payable. During the same period of the prior year, net cash provided by financing activities of $282,000 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 December 31, 2020, the Company incurred a net loss of $538,000 and used cash in operating activities of $375,000, and at December 31, 2020, the Company had a stockholders' deficiency of $6,387,000. In addition, as of December 31, 2020, the Company is delinquent in payment of $697,000 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 December 31, 2020 and June 30, 2020:




                                                     December 31,            June 30,
                                                         2020                  2020
(a) Unsecured convertible notes ($19,000 and
$18,000 in default)                                 $      61,000          $    59,000
(b) Notes payable (in default)                            431,000              423,000
(c) Notes payable (in default)                             27,000               26,000
Total notes-third parties                           $     519,000          $   508,000




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(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, 2020, convertible notes totaled $59,000. During the period ended December 31, 2020, interest of $2,000 was added to the principal, resulting in a balance owed of $61,000 at December 31, 2020. On December 31, 2020, $19,000 of the convertible notes were in default and convertible at a conversion price of $0.30 per share into 62,619 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 521,528 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 December 31, 2020, interest of $8,000 was added to principal resulting in a balance owed of $431,000 at December 31, 2020. At December 31, 2020, $389,000 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 December 31, 2020, interest of $1,000 was added to principal resulting in a balance owed of $27,000 at December 31, 2020.

Convertible notes and notes payable-related parties

Notes payable-related parties includes principal and accrued interest and consists of the following at December 31, 2020 and June 30, 2020:




                                                     December 31,           June 30,
                                                         2020                 2020
(a) Convertible notes- The Matthews Group           $  1,683,000          $ 1,560,000
(b) Notes payable- The Matthews Group                  3,017,000            2,630,000
(c) Convertible notes-other related parties
($220,000 and $215,000 in default)                       301,000              294,000
Total notes-related parties                         $  5,001,000          $ 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 (see Note 6) 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 December 31, 2020, $67,000 of notes payable were issued and interest of $56,000 was added to principal, resulting in a balance owed of $1,683,000 at December 31, 2020. At December 31, 2020, the notes are convertible at a conversion price of $0.08 per share into 21,042,587 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 6) dated December 31, 2015. At June 30, 2020, notes due to The Matthews Group totaled $2,630,000. During the period ended December 31, 2020, $269,000 of notes payable were issued and interest of $118,000 was added to principal, resulting in a balance owed of $3,017,000 at December 31, 2020.



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(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 December 31, 2020, interest of $7,000 was added to principal resulting in a balance owed of $301,000 at December 31, 2020. At December 31, 2020, $220,000 of the notes were due in 2010 and are in default, and the balance of $81,000 is due on demand. At December 31, 2020, $220,000 of the notes are convertible at a conversion price of $0.30 per share into 732,081 shares of the Company's common stock, and $81,000 of the notes are convertible at a conversion price of $0.08 per share into 1,013,800 shares of the Company's common stock.

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.



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.



  21






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.

© Edgar Online, source Glimpses

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Financials (USD)
Sales 2021 0,39 M - -
Net income 2021 -1,09 M - -
Net Debt 2021 5,83 M - -
P/E ratio 2021 -1,82x
Yield 2021 -
Capitalization 2,00 M 2,00 M -
EV / Sales 2020 14,5x
EV / Sales 2021 20,1x
Nbr of Employees -
Free-Float 25,4%
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Managers and Directors
Van Thuy Tran Chairman, Chief Executive Officer & Treasurer
Laird E. Powers Independent Director
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