VERITEC INC - Quarter Report: 2008 December (Form 10-Q)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM l0-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

for the quarterly period ended DECEMBER 31, 2008

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

for the transition period from                      to                     .

VERITEC, INC.

(Exact name of Registrant as Specified in its Charter)

Nevada		95-3954373
(State or Other Jurisdiction of		(IRS Employer
Incorporation or Organization)		Identification No.)
2445 Winnetka Avenue N. Golden Valley, MN		55427
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code: (763) 253-2670

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

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

Large accelerated filer o		Accelerated filer o		Non-accelerated filer   o (Do not check if a smaller reporting company)		Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
Yes þ No o

As of December 31, 2008, there were 15,115,088 shares of the issuer’s common stock outstanding.

 

 

VERITEC, INC.

FORM 10-Q
FOR THE FISCAL QUARTER ENDED DECEMBER 31, 2008

TABLE OF CONTENTS

		Page No.
PART I			3
ITEM 1 FINANCIAL STATEMENTS			3
ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			12
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			15
ITEM 4 CONTROLS AND PROCEDURES			15
PART II			16
ITEM 1 LEGAL PROCEEDINGS			16
ITEM 1A RISK FACTORS			17
ITEM 6 EXHIBITS			17
SIGNATURES			18
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I

ITEM 1 FINANCIAL STATEMENTS

VERITEC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

		December 31,				June 30,
		2008				2008
		(Unaudited)
ASSETS
Current Assets:
Cash		$	172,538			$	334,702
Accounts receivable, net			24,350				35,125
Inventories			16,248				30,632
Prepaid expenses			48,150				3,150
Total Current Assets			216,286				403,609
Property and Equipment, net			71,449				81,901
Other assets			43,756				43,756
Total Assets		$	376,491			$	529,266
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current Liabilities:
Accounts payable		$	81,535			$	128,498
Accrued expenses			331,563				214,018
Total Current Liabilities			413,098				342,516
Commitments and Contingencies
Stockholders’ Equity:
Convertible preferred stock, par value $1.00; authorized 10,000,000 shares, 276,000 shares of Series H authorized, 1,000 shares issued			1,000				1,000
Common stock, par value $.01; authorized 20,000,000 shares, 15,115,088 shares issued			151,151				151,151
Additional paid-in capital			13,687,055				13,674,471
Accumulated deficit			(13,875,813	)			(13,639,872	)
Total Stockholders’ Equity (Deficit)			(36,607	)			186,750
Total Liabilities and Stockholders’ Equity (Deficit)		$	376,491			$	529,266

See notes to condensed consolidated financial statements

VERITEC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

		Three months ended December 31,
		2008				2007
License and other revenue		$	268,327			$	583,427
Cost of Sales			64,351				54,805
Gross Profit			203,976				528,622
Operating Expenses:
Selling, general and administrative			255,058				317,027
Research and development			135,277				150,313
Total Operating Expenses			390,335				467,340
Income/(Loss) from Operations			(186,359	)			61,282
Other Income:
Interest income			891				5,498
Net Income/(Loss)		$	(185,468	)		$	66,780
Income/(Loss) Per Common Share
Basic and Diluted		$	(0.01	)		$	0.00

See notes to condensed consolidated financial statements

VERITEC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

		Six months ended December 31,
		2008				2007
License and other revenue		$	700,859			$	653,641
Cost of Sales			127,946				85,692
Gross Profit			572,913				567,949
Operating Expenses:
Selling, general and administrative			576,434				671,963
Research and development			234,372				290,276
Total Operating Expenses			810,806				962,239
Loss from Operations			(237,893	)			(394,290	)
Other Income:
Interest income			1,952				14,055
Gain on sale of property and equipment			—				985
Total Other Income			1,952				15,040
Net Loss		$	(235,941	)		$	(379,250	)
Loss Per Common Share
Basic and Diluted		$	(0.02	)		$	(0.03	)

See notes to condensed consolidated financial statements

VERITEC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

		Six months ended December 31,
		2008				2007
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss		$	(235,941	)		$	(379,250	)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation			19,469				15,094
Amortization of software license			—				16,352
Stock based compensation			38,834				39,853
Interest income added to note receivable from RBA			—				(5,284	)
Services applied to reduce note receivable from RBA			—				57,750
Gain on sale of property and equipment			—				(985	)
Reverse allowance for note receivable from RBA			—				(48,000	)
Changes in operating assets and liabilities:
Accounts receivable			10,775				(29,929	)
Inventories			14,384				6,198
Prepaid expenses			(45,000	)			14,675
Accounts payables and accrued expenses			44,332				(184,515	)
Net cash used by operating activities			(153,147	)			(498,041	)
CASH FLOWS FROM INVESTING ACTIVITIES
Advances on note receivable			—				(50,950	)
Purchase of property and equipment			(9,017	)			(22,750	)
Proceeds from sale of property and equipment			—				985
Net cash used in investing activities			(9,017	)			(72,715	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds on subscription receivable (including $7,557 interest credited to additional paid-in capital)			—				111,111
NET DECREASE IN CASH			(162,164	)			(459,645	)
CASH AT BEGINNING OF PERIOD			334,702				790,089
CASH AT END OF PERIOD		$	172,538			$	330,444
NONCASH ACTIVITIES
Issuance of common stock for accrued expenses		$	—			$	27,450

See notes to condensed consolidated financial statements

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

A. THE COMPANY

References to the “Company” refer to Veritec, Inc. (Veritec) and its wholly owned subsidiary VCode Holdings, Inc. (VCode).

B. BASIS OF PRESENTATION

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

In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six month period ended December 31, 2008, are not necessarily indicative of the results that may be expected for the year ended June 30, 2009. For further information, refer to the Consolidated Financial Statements and footnotes thereto included in our Form 10-K as of and for the year ended June 30, 2008. The Condensed Consolidated Balance Sheet at June 30, 2008, has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by GAAP.

The accompanying condensed consolidated financial statements include the accounts of Veritec and VCode. All inter-company transactions and balances were eliminated in consolidation.

C. NATURE OF BUSINESS

The Company is primarily engaged in the development, marketing, and sales of a line of microprocessor based encoding and decoding systems that utilize Matrix Symbology technology, a two-dimensional barcode technology originally invented by the founders of Veritec under United States patents 4,924,078, 5,331,176, 5,612,524 and 7,159,780. The Company’s encoding and decoding systems allow a manufacturer, distributor, reseller or user of products, to create and apply unique identifiers to the products in the form of a coded symbol. The coded symbol containing the binary encoded data applied to the product enable automated manufacturing control, together with identification, tracking, and collection of data through cameras, readers and scanners also marketed by the Company. The collected data is then available for contemporaneous verification or other user definable purposes. Veritec has also developed a Secured Identification System based upon its proprietary VSCode^® and VeriCode^® Symbology. The Company’s Secured Identification System enables the storage of images, biometric information and data for contemporaneous verification of an individual’s unique identity. In addition to its United States patents, the Company holds patents in Europe (German Patent No. 69033621.7; French Patent No. 0438841; and Great Britain Patent No. 0438841); and has applications pending with the United States Patent and Trademark Office for novel uses of its Multi-Dimensional Matrix Symbology.

In November 2003, Veritec formed VCode to which it assigned United States patents 4,924,078, 5,331,176 and 5,612,524, together with all corresponding patent applications, foreign patents, foreign patent applications, and all continuations, continuations in part, divisions, extensions, renewals, reissues and re-examinations thereof. VCode in turn entered into an Exclusive License Agreement with VData LLC (VData), an Illinois limited liability company unrelated to Veritec. The purpose of the Exclusive Licensing Agreement is to allow VData to pursue enforcement and licensing of the patents against parties who wrongfully exploit the technology of such patents. VData is the wholly owned subsidiary of Acacia Research Corporation (NASDAQ: ACTG).

The Exclusive License Agreement provides that all expenses related to the enforcement and licensing of the patents will be the responsibility of VData. The Company and VData share the net proceeds arising from the enforcement or licensing of the patents.

In November 2008, VData and Vcode mutually agreed to terminate the Exclusive License Agreement between the two companies.

Infringement revenue had been a primary source of revenue for the Company in past periods. Patents 4,924,078 and 5,612,524, which were the subject of the infringement claims, are currently being reexamined by the U.S. Patent and Trademark Office. The United States District Court for the District of Minnesota recently ruled that the 5,612,524 patent was invalid and unenforceable. The Company had been intending to pursue an appeal to this decision, however given the severance of the agreement with VData it is doubtful the Company will continue to consider the appeal. As a result of these actions and the termination of the Exclusive License Agreement with VData, infringement revenue from patents 4,924,078 and 5,612,524 has ceased.

D. SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition:

The Company accounts for revenue recognition in accordance with SEC Staff Accounting Bulletin (SAB) No. 101 “Revenue Recognition in Financial Statements” and related amendments. Revenues for the Company are classified into four separate products; license revenue (Veritec’s Multi-Dimensional matrix symbology), hardware revenue, and identification card revenue (license and other) and infringement revenue. Revenues from licenses, hardware and identification cards are recognized when the product is shipped and collection is reasonably assured. The process typically begins for license and hardware revenue with a customer purchase order detailing its hardware specifications so the Company can import its software into the customer’s hardware. Once importation is completed, if the customer only wishes to purchase a license, the Company typically transmits the software to the customer via the internet. Revenue is recognized at that point. If the customer requests both license and hardware products, once the software is imported into the hardware and the process is complete, the product is shipped and revenue is recognized at time of shipment. Once the software and/or hardware are either shipped or transmitted, the customers do not have a right of refusal or return. Under some conditions, the customers remit payment prior to the Company having completed importation of the software. In these instances, the Company delays revenue recognition and reflects the prepayments as customer deposits.

The process for identification cards begins when a customer requests, via the internet, an identification card. The card is reviewed for design and placement of the data, printed and packaged for shipment. At the time the identification cards are shipped and the customer has met the required payment terms, the revenue is recognized.

The Company had received infringement revenue under an Exclusive License Agreement with VData. The Exclusive License Agreement with VData provided that all expenses related to the enforcement and licensing of the patents were the responsibility of VData. The Company and VData shared the net proceeds arising from enforcement or licensing of the patents. As a result, all infringement revenue had been recognized at the time it was received. None of the infringement revenue was refundable to any party once received. As a result of the United States District Court for the District of Minnesota ruling and the termination of the Exclusive License Agreement with VData, infringement revenue has ceased.

Patent Costs:

The patent application costs are capitalized and, when approved, will be amortized over its estimated useful life. If not approved, or if considered impaired, these costs will be written off when deemed impaired.

Income Taxes:

The Company’s adoption, on July 1, 2007, of Financial Accounting Standards Board (FASB) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes (as amended)”, did not have a significant impact on the Company’s consolidated financial position, results of operations, and cash flows.

E. NET INCOME (LOSS) PER COMMON SHARE

Basic net income (loss) per common share is computed by dividing the income (loss) available to common stockholders by the weighted-average number of common shares outstanding. Diluted net income (loss) per common share, in addition to the weighted-average number of common shares outstanding determined for basic net income (loss) per common share, includes potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.

The weighted average shares outstanding were 15,115,088 and 15,113,088 for the three months ended December 31, 2008 and 2007, respectively. The weighted average shares outstanding were 15,115,088 and 15,104,958 for the six months ended December 31, 2008 and 2007, respectively. Potentially dilutive instruments include stock options, preferred stock and stock bonus/compensation (Note F). For the three months ended December 31, 2008, stock (1,050,000 restricted common shares), stock options (731,749 common shares) and preferred stock (10,000 common shares) were antidilutive and, therefore, were not included in the computation of diluted net loss per common share. For the six months ended December 31, 2008, stock (1,050,000 restricted common shares), stock options (731,749 common shares) and preferred stock (10,000 common shares) were antidilutive and, therefore, were not included in the computation of diluted net loss per common share. For the six months ended December 31, 2007, stock options (252,749 common shares) and preferred stock (10,000 common shares) were antidilutive and, therefore, were not included in the computation of diluted net loss per common share.

Diluted net income per common share for the three months ended December 31, 2007, was computed as follows:

Net income		$	66,780
Weighted average shares outstanding			15,113,088
Incremental shares from assumed exercise or conversion of dilutive instruments:
Options			18,007
Preferred Stock			10,000
Shares outstanding — diluted			15,141,095
Income per common share — diluted		$	0.00

F. STOCK-BASED COMPENSATION

The Company has agreements with certain employees and consultants that provide for five years of annual grants of options, on each employment anniversary date, to purchase shares of the Company’s common stock. The option price is determined based on the market price on the date of the grant for some of the employees and market price on the date of grant for the others, the options vest one year from date of grant, and the options expire five years after vesting. At December 31, 2008, the Company has commitments under these agreements to grant options to acquire 20,000 shares of the Company’s common stock for each fiscal year for 2010 through 2011 and 10,000 shares for each fiscal year for 2012 through 2013, totaling 60,000 shares.

A summary of outstanding stock options is as follows:

		Number of				Weighted - Average
		Shares				Exercise Price
Outstanding at June 30, 2008			267,749			$	0.82
Granted			464,000			$	0.29
Outstanding at December 31, 2008			731,749			$	0.48

The weighted-average remaining contractual life of stock options outstanding at December 31, 2008 is 5.2 years.

The weighted-average fair value of options granted for the three months ended December 31, 2008 and 2007 was $0.30 and $0.50, respectively. Stock-based compensation expense was $11,414 and $30,087 during the three months ended December 31, 2008 and 2007, respectively. As of December 31, 2008, there was $125,097 of unrecognized compensation costs related to stock options. These costs are expected to be recognized over the next four quarters.

The Board of Directors has authorized the Chief Executive Officer to issue up to 1,000,000 shares of the Company’s common stock in the form of options or stock bonuses to employees and consultants. At December 31, 2008, stock and stock options totaling 444,249 have been committed under this authorization.

G. OTHER SIGNIFICANT EVENTS

In November 2006, the Company entered into an agreement with a manufacturing company to design and develop a line of readers to overcome the Company’s dependence on outside suppliers. In phase one of the project, a proto-type cell phone reader designed by the manufacturing company was evaluated and accepted. Phase Two of the project requires the manufacturing company to design and manufacture four individual proto-type models of readers that work with Matrix Symbologies. The agreement required a deposit of $30,000 and payments of $30,000 for reaching each of four defined milestones, with the total project cost not to exceed $150,000. The project has stalled and it is doubtful there will be any continuation thereof. The Company is considering their options but believes at this time they have little recourse against the manufacturer. To date the Company has made the required deposit of $30,000, a $20,000 advance and accrued another $95,000 of related expenses, for a total cost of $145,000 against the maximum expenditure of $150,000. Payments under this agreement are recorded as research and development expense as the service is provided.

In August 2007, the Company entered into an agreement with a consultant to purchase certain intellectual property. The agreement requires the Company to make a $25,000 payment once it has been proven that the intellectual property is patentable. It also requires the Company to issue 60,000 shares of the Company’s common stock to the consultant once one or more patents have been issued. At December 31, 2008, the intellectual property information has been submitted to the Company’s patent attorney and is believed to be patentable. The consultant has been issued the initial payment of $25,000.

On December 5, 2008, the Board of Directors accepted Ms. Van Tran’s resignation as President and CEO of Veritec. The Board, upon her resignation, appointed Ms. Tran as Veritec’s Executive Chairman of the Board and appointed Mr. Jeffrey Hattara to serve as the Company’s President and Chief Executive Officer (CEO). An employment agreement for Mr. Hattara has not yet been finalized. Until such time as the agreement has been completed, Mr. Hattara will assume the duties of the President and CEO of the Company with assistance from Ms. Tran who continues to oversee daily operations. Mr. Hattara will not be paid, at least initially, any annual salary, but the Company’s Board of Directors authorized the grant of restricted stock and stock options to Mr. Hattara, as further described below.

In addition, on December 5, 2008, the Board of Directors appointed Mr. Gerald Fors, former Chief Financial Officer of Veritec, to re-assume the position of Chief Financial Officer on a part time basis as a consultant until such time as the Company or Mr. Fors sever the relationship. Mr. Fors’ consulting agreement also has not yet been finalized although he has assisted the Company’s internal staff in the preparation of the financial information. Mr. Fors’ consulting agreement is expected to include hourly compensation and stock options.

On December 5, 2008, the Company’s Board of Directors granted Mr. Hattara 1,000,000 restricted shares of the Company’s common stock. Also on December 5, 2008, the board granted 50,000 shares of common stock to Veritec’s future in house attorney, who started in January 2008. The shares for both individuals were valued at the fair market price for December 5, 2008 of $0.30 per share, for a total expense to the Company of $26,250 for the three months and six months ended December 31, 2008. Of the 1,050,000 shares of common stock, 525,000 shares vest six months from the grant date of December 5, 2008 and the remainder six months later. The Board also granted eight employees a combined total of 444,000 options to purchase common stock at the fair market price of $0.30 per share. The stock options vest twelve months from the grant date of December 5, 2008 and have an additional five years in which to be exercised.

In addition, on December 5, 2008, the Company adopted an incentive compensation bonus plan to provide payments to key employees in the aggregated amount of 10% of pre-tax earnings in excess of $3,000,000.

H. RECENTLY ISSUED ACCOUNTING STANDARD

In September 2006, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value Measurements (as amended)”, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosure about fair value measurements. SFAS No. 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value, and therefore, does not expand the use of fair value in any new circumstances. SFAS No. 157 will be effective for the Company beginning fiscal year 2009. In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, Effective Date of FASB Statement No. 157. This FSP permits the delayed application of SFAS No. 157 for all non-recurring fair value measurement of non-financial assets and non-financial liabilities until fiscal years beginning after November 15, 2008. Management is currently evaluating the impact SFAS No. 157 will have on the consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities (as amended), Including an Amendment of FASB Statement No. 115,” which permits entities to measure eligible financial assets, financial liabilities and firm commitments at fair value, on an instrument-by-instrument basis, that are otherwise not permitted to be accounted for at fair value under other generally accepted accounting principles. The fair value measurement election is irrevocable and subsequent changes in fair value must be recorded in earnings. SFAS No. 159 will be effective for the Company beginning fiscal year 2009. Management is currently evaluating if it will elect the fair value option for any of the Company’s eligible financial instruments.

I. SUBSEQUENT EVENTS

In January 2009, the Company formed a new subsidiary, Veritec Financial Systems, Inc. (“VTFS”), a Delaware corporation. This new subsidiary was formed to engage in the business, among other things, of licensing the Company’s banking software to others and providing professional services in connection therewith.

Also on December 31, 2008, the Company entered into a six-month consulting contract with a commitment over the period of up to $150,000. The Company’s newly formed subsidiary (VTFS) entered into a twelve-month processing center contract, beginning February 1, 2009, with total commitment over the period of approximately $450,000.

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

Results of Operations — December 31, 2008 compared to December 31, 2007

We had a net loss of $185,468 for the three months ended December 31, 2008 compared to a net income of $66,780 for the three months ended December 31, 2007. For the six months ended December 31, 2008, we had net loss of $235,941 compared to a net loss of $379,250 for the six months ended December 31, 2007.

License and Other Revenues

License and other revenues are derived from our Product Identification systems sold principally to customers in the LCD monitor industry.

For the three months ended December 31, 2008, license and other revenue was $268,327 compared to $583,427 for the 2007 period, a decrease of $315,100. Included in the license and other revenue for the 2007 period is $445,349 of infringement revenue which has since ceased. For the three months ended December 31, 2008, infringement income was $0. Excluding infringement revenue, license and other revenue increased for the three months ended December 31, 2008 by $130,249 compared to the 2007 period, which is attributable to growth of the demand for LCD screens. Revenues from the LCD market remain unpredictable as they are generated when customers open new production facilities or update production equipment; however, for now the Company believes, given the state of the economy, demand for product identification product licenses in the LCD industry will continue a downward trend. For the six months ended December 31, 2008 and 2007, the license and other revenue are $700,859 and $653,641, respectively. The first three months of fiscal 2009 saw large revenues from licenses as a result of the demand for LCD screens with the demand lessening the next three months. For the six months ended December 31, 2008 and 2007, revenue from infringement revenue was $0 and $445,349, respectively.

For the three months ended December 31, 2008 and 2007, the Company had received $0 and $445,349, respectively from infringement revenue through its relationship with VData. The patents (4,924,078 and 5,612,524), which were the subject of the infringement claims, are currently being reexamined by the U.S. Patent and Trademark Office. The United States District Court for the District of Minnesota recently ruled that the 5,612,524 patent was invalid and unenforceable. The Company had been intending to pursue an appeal to this decision, however given the severance of the agreement with VData it is doubtful the Company will continue to consider the appeal. As a result of these actions and the termination of the Exclusive License Agreement with VData, infringement revenue from patents 4,924,078 and 5,612,524 has ceased.

Cost of Goods Sold

Cost of sales for the three months ended December 31, 2008, totaled $64,351 and for the three months ended December 31, 2007, cost of sales were $54,805, an increase of $9,546. The increase was a result of the Company increasing its reserve for inventory obsolescence and using inventory items for purposes of product testing. For the six months ended December 31, 2008, cost of goods sold totaled $127,946 compared to the six months ended December 31, 2007 of $85,692. The increase of $42,254 resulted from establishing a reserve for potential obsolescence of $6,000 and $33,500 for the cost of the licenses sold and inventory used for testing and customer demonstrations.

Operating Expenses

Research and development expense for the three months ended December 31, 2008 totaled $135,277 versus $150,313 for the three months ended December 31, 2007. The decrease of $15,036 was principally the result of reduced project costs totaling $19,000 for the three months ended December 31, 2008. For the three months ended December 31, 2008, the Company has been focusing on one major engineering project, thereby eliminating a demand for additional outside engineering consultants and providing cost savings to the Company. For the six months ended December 31, 2008, research and development costs were $234,372 compared to $290,276 for the six months ended December 31, 2007, a difference of $55,904. For the six months ended December 31, 2008, labor costs increased $27,000 due to additional staffing and wage increases compared to the six months ended December 31, 2007. However the Company saw a decrease for the six months ended December 31, 2008 as a result of the elimination of a consultant position for $16,000 and the discontinuation of projects in the amount of $75,000.

Sales and marketing expense for the three months ended December 31, 2008 were $8,393 compared to $67,393 for the three months ended December 31, 2007, a decrease of $59,000. For the three months ended December 31, 2008, the Company had no sales staff, accounting for $38,477 of cost savings compared to the same three month period ended December 31, 2007. The Company also reduced its sales consultants by $11,510 for the three months ended December 31, 2008 compared to the same three months ended December 31, 2007. The Company, for the three months ended December 31, 2008, paid out commissions of $286 compared to $3,962 for the three month period ended December 31, 2007, a decrease of $3,676. Sales and Marketing expense for the six months ended December 31, 2008 were $45,539 compared to $118,444 for the six months ended December 31, 2007, a difference of $72,905. For the six months ended December 31, 2008, the Company had no sales staff, accounting for $66,736 of cost savings compared to the same six month period ended December 31, 2007. The Company also reduced its sales consultants by $9,000 for the six months ended December 31, 2008 compared to the same six months ended December 31, 2007. The Company, for the six months ended December 31, 2008, paid out commissions of $13,319 compared to $4,570 for the six month period ended December 31, 2007, an increase of $8,749. Reduced travel expenses also contributed to the reduction of sales and marketing expense between the periods.

General and administrative expenses for the three months ended December 31, 2008 were $246,665 compared to $249,634 for the three months ended December 31, 2007, a decrease of $2,969. The decrease was the result of reduced legal & audit expenses totaling $49,110 for the three months ended December 31, 2008 compared to the three months ended December 31, 2007. This reduction was offset by increased costs of $10,392 of increased insurance costs for Directors and Officers insurance coverage and stock and stock option expense of $38,834. For the six months ended December 31, 2008 general and administrative expenses were $530,895 versus $553,519 for the six months ended December 31, 2007, a decrease of $22,624. The decrease was a result of lower legal and audit fees of $44,211, amortization expense of $16,667, compliance reporting fees of $10,007, rent expense $8,233 and reduced cost of $6,823 for office supplies compared to the same period the prior year for a total of $85,941 in reductions. However those reductions were offset by increased costs for outside consultants of $7,549, increased insurance costs for Directors and Officers insurance coverage of $21,720 and reversal of bad debt in prior year of $48,000.

Other Income (Expense)

Interest income for the three months ended December 31, 2008 was $891 compared to $5,498 for the three months ended December 31, 2007 a decrease of $4,607. For the six months ended December 31, 2008 and 2007, interest income was $1,952 and $14,055, respectively. The decrease was a result of the Company’s need for cash to fund the operations, thus drawing down cash reserves and in so doing earning less interest.

Liquidity

At December 31, 2008, the Company has $172,538 and ($196,812) of cash and working capital, respectively. The Company believes its cash and forecasted cash flow from operations will not be sufficient to continue operations through fiscal 2009. The Company believes it will require additional funds to continue its operations through fiscal 2009 and continue to develop its existing and future projects by obtaining investment funds, 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.

Commitments and Contractual Obligations

The Company has one annual lease commitment of $37,800 for the corporate office building, which is leased from Ms. Tran, which expires June 30, 2012. The Company has modified the lease commencing on January 1, 2009 to increase office space for the anticipated growth of its engineering department. The commitment is now $44,100 annually that expires on June 30, 2012. The commitment is for the corporate offices at 2445 Winnetka Avenue North, Golden Valley, Minnesota. The total amount of the 3 1/2-year lease commitment is $154,350.

The Company has entered into a month-by-month lease commitment of $1,200 per month for corporate housing, which is leased from Lawrence Johanns, a principal shareholder. The commitment for corporate housing has commenced as of January 1, 2009 for the residence at 2415 Winnetka Avenue North, Golden Valley, Minnesota.

The Company entered into a six-month consulting contract on December 31, 2008 with a commitment over the period of up to $150,000. The Company’s newly formed subsidiary (VTFS) entered into a twelve-month processing center contract, beginning February 1, 2009, with total commitment over the period of approximately $450,000.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Critical Accounting Policies

Stock-Based Compensation:

The Company accounts for stock-based compensation under Statement of Financial Accounting Standards (SFAS) No. 123(R), “Share-Based Payment” using the modified prospective application method. SFAS No. 123(R) requires the cost of employee compensation paid with equity instruments to be measured based on grant-date fair values and recognized over the vesting period.

Revenue Recognition:

The Company accounts for revenue recognition in accordance with SEC Staff Accounting Bulletin (SAB) No. 101 “Revenue Recognition in Financial Statements” and related amendments. Revenues for the Company are classified into four separate products; license revenue (Veritec’s Multi-Dimensional matrix symbology), hardware revenue, and identification card revenue (license and other) and infringement revenue. Revenues from licenses, hardware and identification cards are recognized when the product is shipped and collection is reasonably assured. The process typically begins for license and hardware revenue with a customer purchase order detailing its hardware specifications so the Company can import its software into the customer’s hardware. Once importation is completed, if the customer only wishes to purchase a license, the Company typically transmits the software to the customer via the internet. Revenue is recognized at that point. If the customer requests both license and hardware products, once the software is imported into the hardware and the process is complete, the product is shipped and revenue is recognized at time of shipment. Once the software and/or hardware are either shipped or transmitted, the customers do not have a right of refusal or return. Under some conditions, the customers remit payment prior to the Company having completed importation of the software. In these instances, the Company delays revenue recognition and reflects the prepayments as customer deposits.

The process for identification cards begins when a customer requests, via the internet, an identification card. The card is reviewed for design and placement of the data, printed and packaged for shipment. At the time the identification cards are shipped and the customer has met the required payment terms, the revenue is recognized.

The Company had received infringement revenue under an Exclusive License Agreement with VData. The Exclusive License Agreement with VData provided that all expenses related to the enforcement and licensing of the patents were the responsibility of VData. The Company and VData shared the net proceeds arising from enforcement or licensing of the patents. As a result, all infringement revenue had been recognized at the time it was received. None of the infringement revenue was refundable to any party once received. As a result of the United States District Court for the District of Minnesota ruling and the termination of the Exclusive License Agreement with VData, infringement revenue has ceased.

ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our financial instruments include cash and cash equivalents. Our cash and cash equivalents are not subject to significant interest rate risk due to the short maturities of these instruments. As of December 31, 2008, the carrying value of our cash and cash equivalents approximated fair value. We have in the past and may in the future obtain marketable debt securities (principally consisting of commercial paper, corporate bonds and government securities) having a weighted average duration of one year or less. Consequently, such securities would not be subject to significant interest rate risk. Our main investment objectives are the preservation of investment capital and the maximization of after-tax returns on our investment portfolio. We do not use derivative instruments for speculative or investment purposes.

ITEM 4 CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We maintain “disclosure controls and procedures” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act), that are designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable assurance of achieving the desired objectives, and we necessarily are required to apply our judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. It was concluded that the disclosure controls and procedures were not effective, because certain deficiencies involving internal controls constituted material weaknesses as discussed below. The material weaknesses identified did not result in the restatement of any previously reported financial statements or any other related financial disclosures, nor does management believe that it had any effect on the accuracy of our financial statements for the current reporting period.

Internal Control over Financial Reporting

There have not been any changes in our internal control over financial reporting during the fiscal year to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

ITEM 1 LEGAL PROCEEDINGS

Vcode joined with VData as Plaintiffs in patent enforcement litigation filed on October 4, 2005, against Brother Industries, Ltd., Sato Corporation, Toshiba Corporation and US Bank National Association in the United States District Court for the District of Minnesota alleging violations of the Company’s patents. US Bank National Association has entered into a licensing agreement with the Company and the case as to that defendant was dismissed. The remaining defendants, Brother Industries, Ltd., Sato Corporation, and Toshiba Corporation, did not settle but were dismissed from the case without prejudice. VData and the Company had been waiting for resolution of the patent reexaminations, described below, before re-asserting claims against the remaining defendants. However, given the severance of the License Agreement between Vcode and VData and the outcome of the Cognex settlement, no further action will be taken.

On March 13, 2006, in response to notices of infringement sent to its customers by VData, Cognex Corporation filed a preemptive action seeking a Declaratory Judgment against VData and the Company in the United States District Court for the District of Minnesota. Amongst other remedies the action sought a ruling from the court that Vcode’s United States Patent No. 5,612,524 was not enforceable against Cognex Corporation and its customers, that the Company has defamed Cognex and that the Company has engaged in unfair and deceptive business practices in violation of Minnesota law. On December 27, 2006, an answer and affirmative defense was filed to contest the plaintiff’s allegations and claims for damages, injunctive relief, attorney’s fees, and costs. On May 19, 2008, the summary judgment was received ruling in favor of Cognex on three of the four claims. The Court found that the asserted claims of the 5,612,524 patent were invalid, the entire patent unenforceable and denied a motion to dismiss the defamation claim. However the Court did grant our motion to dismiss the Minnesota DTPA (Deceptive Trade Practices Act) claim. Cognex subsequently filed a motion for the Court to declare this an exceptional case and award Cognex its attorney fees. On December 15, 2008, all parties reached a mutual settlement. As part of the settlement, the parties mutually agreed to waive their respective rights of appeal. The conditions of the settlement are confidential. The outcome of the settlement eliminates any potential financial liability the Company may have incurred.

On April 6, 2006, the U.S. Patent and Trademark Office granted a Third Party Request for an Ex Parte Reexamination of Vcode’s United States Patent No. 5,612,524. A response on behalf of the Company rebutting the allegations in the Request for Reexamination was filed with the U.S. Patent and Trademark Office. In December 2007, the Company received a determination by the U.S. Patent and Trademark Office stating that some of the claims in the patent were patentable and others were being rejected. The Company submitted a rebuttal against the decision in February 2008. Although the Company has not yet been notified of any final decision, it is doubtful the Company will continue any further pursuit of this decision, should it be adverse given the severance of the agreement with VData. The Company believes that when the final determination occurs, even if the determination remains adverse to the patent, it would not be detrimental to the Company’s ability to market its products, but will be detrimental to the collection of licensing fees based upon this patent.

On May 23, 2006, Vcode joined with VData as a Plaintiff in a pending patent enforcement litigation filed against Aetna, Inc., PNY Technologies, Inc., Merchants’ Credit Guide Co. The Allstate Corporation, and American Heritage Life Insurance Company in the United States District Court for the District of Minnesota alleging violations of the Company’s patents. The Allstate Corporation and American Heritage Life Insurance Company have entered into a licensing agreement with the Company and the case as to those defendants has been dismissed. Aetna, Inc., and Merchants’ Credit Guide Co. have filed responsive pleadings in the action. PNY Technologies, Inc. has counterclaimed with allegations of non-infringement, invalidity, and inequitable conduct and is seeking attorney’s fees and costs. Defendant Aetna, Inc. filed a Motion to Dismiss and a Motion for Rule 11 Sanctions. The Court denied both of Aetna’s motions. Defendant Merchant’s Credit Guide Co. filed a Motion to Stay Alternative Motion for Sanctions. The Court granted Merchants’ Motion to Stay and the case is currently stayed pending reexamination of the patents. This case has not been set for trial.

On October 26, 2006, a Third Party Request for an Ex Parte Reexamination of Vcode’s United States Patent No. 4,924,078 was made. The Company was awaiting a determination from the U.S. Patent and Trademark Office as to whether a grant of the request for reexamination was merited. On January 17, 2007, the reexamination for United States Patent No. 4,924,078 was ordered. The Company believes that a determination adverse to the patent would not be detrimental to the Company’s ability to market its products, but would be detrimental to the collection of licensing fees based upon this patent.

Vcode joined with VData as Plaintiffs in patent enforcement litigation filed on August 21, 2007, against Data Logic, Inc., Hand Held Products, Inc. and Siemens Energy and Automation, Inc. in the United States District Court for the District of Texas alleging violations of the Company’s Patent No. 5,331,176. Hand Held Products, Inc. has entered into an agreement with the Company and the case as to that defendant was dismissed. In April 2008, a proposed agreement between the remaining parties was reached to dismiss without prejudice the claim. The agreement is awaiting the signatures of all parties.

ITEM 1A RISK FACTORS

There have been no material changes to our risk factors and uncertainties during the six months ended December 31, 2008. For a discussion of the Risk Factors, refer to the “Risk Factors” section of Item 1 in the Company’s Annual Report on Form 10-K for the period ended June 30, 2008.

ITEM 6 EXHIBITS

31.1		CEO Certification required by Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934.
31.2		CFO Certification required by Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934.
32.1		Veritec, Inc. Certification of CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350).
32.2		Veritec, Inc. Certification of CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350).

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

VERITEC, INC.

By		/s/ Jeffrey Hattara   Jeffrey Hattara				February 13, 2009
		President, Chief Executive Officer
By		/s/ Gerald Fors   Gerald Fors				February 13, 2009
		Chief Financial Officer

EXHIBIT INDEX

31.1		CEO Certification required by Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934.
31.2		CFO Certification required by Rule 13a-14(a)/15d-14(a) under the Securities Exchange Act of 1934.
32.1		Veritec, Inc. Certification of CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350).
32.2		Veritec, Inc. Certification of CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350).