The following discussion and analysis of financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and related notes included elsewhere in this report. This discussion
contains forward-looking statements that involve risks, uncertainties, and
assumptions. See "Note Regarding Forward-Looking Statements." Our actual results
could differ materially from those anticipated in the forward-looking statements
as a result of certain factors discussed elsewhere in this report.
The following discussion and analysis of the Company's financial condition and
results of operations is based on the preparation of our financial statements in
accordance with U.S. generally accepted accounting principles. You should read
this discussion and analysis together with such financial statements and the
related notes thereto.
COVID-19 Considerations
The Company is subject to risks and uncertainties as a result of the COVID-19
pandemic. The extent of the impact of the COVID-19 pandemic on the Company's
business is highly uncertain and difficult to predict, as the responses that the
Company, other businesses and governments are taking continue to evolve.
Furthermore, capital markets and economies worldwide have also been negatively
impacted by the COVID-19 pandemic, and it is possible that the COVID-19 pandemic
could cause a local, national and/or global economic recession. Policymakers
around the globe have responded with fiscal policy actions to support the
economy as a whole, but it is presently unknown whether and to what extent
further fiscal actions will continue. The magnitude and overall effectiveness of
these actions remain uncertain.
The Company believes that its Mobile Banking revenues have been negatively
affected due to the reduction in customer spending, which negatively impacts the
amount of fees earned by the Company from its customers. The Company is also
currently experiencing a decline in revenues earned under the management
services agreement with The Matthews Group, as The Matthews Group's customer
orders have been negatively impacted by the effects of 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. As of the date of issuance of the Company's financial
statements, the extent to which the COVID-19 pandemic may in the future
materially impact the Company's financial condition, liquidity or results of
operations is uncertain.
5
Results of Operations - June 30, 2021 compared to June 30, 2020
Revenues
Details of revenues are as follows:
Year Ended June 30, Increase (Decrease)
2021 2020 $ %
Mobile banking technology $ 93,000 $ 100,000 $ (7,000 ) (7.0 )
Other revenue, management fee -
related party 296,000 338,000 (42,000 ) (12.4 )
Total Revenues $ 389,000 $ 438,000 $ (49,000 ) (11.2 )
• Mobile banking technology
Mobile Banking Technology revenues include products such as the Company's Blinx
On-Off™ prepaid toggle Card and its Open Loop/Close 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 years ended June 30, 2021,
and 2020 were $93,000 and $100,000, 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.
• 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. 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, 2022. The Company earns a fee
of 35% of all revenues billed up to June 30, 2022, and recognizes management fee
revenue as services are performed. For the years ended June 30, 2021 and 2020,
revenue earned from the management services agreement was $296,000 and $338,000,
respectively.
Cost of Sales
Cost of sales for the years ended June 30, 2021 and 2020 totaled $222,000 and
$210,000, respectively.
Operating Expenses
General and administrative expenses for the years ended June 30, 2021 and 2020
totaled $861,000 and $630,000, 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.
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 Consolidated
Financial Statements). During the twelve months ended June 30, 2020, the Company
recorded a gain on extinguishment of convertible note payable of $167,000.
Interest expense for the twelve months ended June 30, 2021 and 2020, was
$397,000 and $341,000, respectively. The increase was due to the increase in our
notes payable balance.
Net Loss
We had a net loss of $1,091,000 for the year ended June 30, 2021, compared to a
net loss of $576,000 for the year ended June 30, 2020.
6
Liquidity and Capital Resources
Our cash balance on June 30, 2021 increased to $238,000 as compared to $228,000
on June 30, 2020. The increase was the result of the $682,000 cash provided by
financing activities offset by $672,000 cash used in operating activities . Net
cash used in operations during the period ended June 30, 2021, was $672,000,
compared with $380,000 of net cash used in operations during the same period of
the prior year. Cash used in operations during the period ended June 30, 2021,
was primarily from our net loss of $1,091,000, offset by an increase in interest
accrued on notes payable of $397,000, common stock issued for services of
$10,000, and general changes to our working capital accounts of $12,000. Net
cash provided by financing activities of $682,000 during the period ended June
30, 2021, was due to proceeds received of $118,000 from SBA PPP loans payable,
and proceeds received of $564,000 from notes payable. During the same period of
the prior year, net cash provided by financing activities of $517,000 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 year ended June 30, 2021, the Company incurred a loss of $1,091,000
and used cash in operating activities of $672,000, and at June 30, 2021, the
Company had a stockholders' deficiency of $6,930,000. In addition, as of June
30, 2021, the Company is in default on $710,000 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, 2021 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 2022 without continued
external investment. The Company believes it will require additional funds to
continue its operations through fiscal 2022 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
Convertible and notes payable includes principal and accrued interest and
consists of the following at June 30, 2021 and June 30, 2020:
June 30, June 30,
2021 2020
(a) Unsecured convertible notes ($19,000 and
$18,000 in default) $ 62,000 $ 59,000
(b) Notes payable (in default) 440,000 423,000
(c) Notes payable (in default) 27,000 26,000
Total notes-third parties $ 529,000 $ 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.
At June 30, 2019, convertible notes totaled $224,000. During the years ended
June 30, 2020, interest of $2,000 was added to the principal. In addition, the
Company and one of the holders of the convertible notes agreed to extinguish a
convertible note payable of $167,000 resulting in a gain on extinguishment,
resulting in a balance owed of $59,000 at June 30, 2020. During the years ended
June 30, 2021, interest of $3,000 was added to the principal resulting in a
balance owed of $62,000 at June 30, 2021. On June 30, 2021, $19,000 of the
convertible notes were in default and convertible at a conversion price of $0.30
per share into 63,952 shares of the Company's common stock. The balance of
$43,000 is due on demand and convertible at a conversion price of $0.08 per
share into 530,658 shares of the Company's common stock.
7
(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, 2019, the notes totaled $405,000. During the year ended June 30,
2020, interest of $18,000 was added to principal resulting in a balance owed of
$423,000 at June 30, 2020. During the year ended June 30, 2021, interest of
$17,000 was added to principal resulting in a balance owed of $440,000 at June
30, 2021. At June 30, 2021, $396,000 of notes are secured by the Company's
intellectual property and $44,000 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, 2019, the notes totaled $25,000. During the year ended June 30,
2020, interest of $1,000 was added to principal, resulting in a balance owed of
$26,000 at June 30, 2020. During the year ended June 30, 2021, interest of
$1,000 was added to principal, resulting in a balance owed of $27,000 at June
30, 2021.
Convertible notes and notes payable-related parties
Convertible and notes payable-related parties includes principal and accrued
interest and consists of the following at June 30, 2021 and June 30, 2020:
June 30, June 30,
2021 2020
(a) Convertible notes-The Matthews Group $ 1,741,000 $ 1,560,000
(b) Notes payable-The Matthews Group 3,375,000 2,630,000
(c) Convertible notes-other related parties
($224,000 and $215,000 in default) 308,000 294,000
Total notes-related parties $ 5,424,000 $ 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, and 50% by Larry Johanns, a significant shareholder of the
Company. At June 30, 2019, convertible notes due to The Matthews Group totaled
$1,453,000. During the year ended June 30, 2020, interest of $107,000 was added
to principal resulting in a balance payable of $1,560,000 at June 30, 2020.
During the year ended June 30, 2021, $67,000 of notes payable were issued and
interest of $114,000 was added to principal, resulting in a balance payable of
$1,741,000 at June 30, 2021. At June 30, 2021, the notes are convertible at a
conversion price of $0.08 per share into 21,757,975 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 September 30, 2015. At June 30, 2019, notes due to The
Matthews Group totaled $1,915,000. During the year ended June 30, 2020, $517,000
of notes payable were issued and interest of $198,000 was added to principal,
resulting in a balance owed of $2,630,000 at June 30, 2020. During the year
ended June 30, 2021, $497,000 of notes payable were issued and interest of
$248,000 was added to principal, resulting in a balance owed of $3,375,000 at
June 30, 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, 2019, convertible notes due to other related parties totaled
$279,000. During the year ended June 30, 2020, interest of $15,000 was added to
principal resulting in a balance owed of $294,000 at June 30, 2020. During the
year ended June 30, 2021, interest of $14,000 was added to principal resulting
in a balance owed of $308,000 at June 30, 2021. At June 30, 2021, $224,000 of
the notes were due in 2010 and are in default, and the balance of $84,000 is due
on demand. At June 30, 2021, $224,000 of the notes are convertible at a
conversion price of $0.30 per share into 747,081 shares of the Company's common
stock, and $84,000 of the notes are convertible at a conversion price of $0.08
per share into 1,045,050 shares of the Company's common stock.
8
Loans Payable
On March 23, 2021, the Company was granted its first loan for $59,000 (the "PPP
loan") from Community Federal Savings Bank, pursuant to the Paycheck Protection
Program (the "PPP") under the CARES Act. On June 1, 2021, the Company was
granted a second PPP loan for $59,000 from Community Federal Savings Bank with
similar loan terms. Concurrently, as of June 30, 2021, the total amount owed for
PPP loans was $118,000.
The PPP loan matures on March 23, 2026, bears 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 6 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.
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.
9
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.
b. Other revenue, management fee - related party
On September 30, 2015, the Company sold all of its assets of its Barcode
Technology comprised solely of its intellectual property to The Matthews Group
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, 2022. 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. 
