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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)

04/30/2021 | 01:15pm EDT

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.



  17





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.



  18






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.

© Edgar Online, source Glimpses

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Financials (USD)
Sales 2020 0,44 M - -
Net income 2020 -0,58 M - -
Net Debt 2020 4,76 M - -
P/E ratio 2020 -2,75x
Yield 2020 -
Capitalization 2,20 M 2,20 M -
EV / Sales 2019 18,9x
EV / Sales 2020 14,5x
Nbr of Employees -
Free-Float 24,8%
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Income Statement Evolution
Managers and Directors
Van Thuy Tran Chairman, Chief Executive Officer & Treasurer
Laird E. Powers Independent Director
Steve D. Handy Independent Director
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