VERITEC INC - Quarter Report: 2009 September (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

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

for the transition period from                      to                     .

Commission File Number. 0-15113

VERITEC, INC.

Nevada		95-3954373
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o 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 l2b-2 of the Exchange Act. (Check one):

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

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 September 30, 2009, there were 16,315,088 shares of the issuer’s common stock outstanding.

 

 

VERITEC, INC.

FORM 10-Q
FOR THE FISCAL QUARTER ENDED SEPTEMBER 30, 2009

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			10
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			12
ITEM 4 CONTROLS AND PROCEDURES			12
PART II			13
ITEM 1 LEGAL PROCEEDINGS			13
ITEM 1A RISK FACTORS			13
ITEM 6 EXHIBITS			13
SIGNATURES			13
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1

PART I

ITEM 1		FINANCIAL STATEMENTS

VERITEC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

		September 30,				June 30,
		2009				2009
		(Unaudited)
ASSETS
Current Assets:
Cash		$	53,384			$	50,019
Accounts receivable, net of allowance of $8,400			64,273				28,376
Inventories			3,829				6,217
Prepaid expenses			16,656				23,281
Employee advances			6,900				8,500
Total Current Assets			145,042				116,393
Property and Equipment, net			80,726				93,292
Other assets			43,756				43,756
Total Assets		$	269,524			$	253,441
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current Liabilities:
Notes payable		$	1,360,027			$	20,039
Accounts payable			304,955				187,368
Accrued expenses			256,884				353,161
Total Current Liabilities			1,921,866				560,568
Notes Payable			100,034				885,673
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, 16,315,088 and 16,165,088 shares issued			163,151				161,651
Additional paid-in capital			14,092,430				13,943,046
Accumulated deficit			(16,008,957	)			(15,298,497	)
Total Stockholders’ Deficit			(1,752,376	)			(1,192,800	)
Total Liabilities and Stockholders’ Equity (Deficit)		$	269,524			$	253,441

See notes to condensed consolidated financial statements

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

		Three months ended September 30,
		2009				2008
License and other revenue		$	200,641			$	432,532
Cost of Sales			159,459				63,596
Gross Profit			41,182				368,936
Operating Expenses:
Selling, general and administrative			536,411				321,376
Research and development			188,005				99,095
Total Operating Expenses			724,416				420,471
Loss from Operations			(683,234	)			(51,535	)
Other Income:
Interest income			29				1,061
Interest expense			(27,255	)			—
Total Other Income			(27,226	)			1,061
Net Loss		$	(710,460	)		$	(50,474	)
Loss Per Common Share
Basic and Diluted		$	(0.05	)		$	(0.00	)

See notes to condensed consolidated financial statements

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

		Three months ended September 30,
		2009				2008
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss		$	(710,460	)		$	(50,474	)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation			12,566				9,721
Amortization of debt issuance cost			771				—
Amortization of discount on notes payable			3,306				—
Stock compensation			113,384				1,171
Interest added to notes payable			23,772				—
Changes in operating assets and liabilities:
Accounts receivable			(35,897	)			(57,911	)
Employee advances			1,600				—
Inventories			2,388				14,676
Prepaid expenses			6,625				—
Accounts payables and accrued expenses			58,810				62,917
Net cash used by operating activities			(523,135	)			(19,900	)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment			—				(906	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable			591,500				—
Payments on notes payable			(65,000	)			—
Net cash provided by financing activities			526,500				—
NET INCREASE (DECREASE) IN CASH			3,365				(20,806	)
CASH AT BEGINNING OF PERIOD			50,019				334,702
CASH AT END OF PERIOD		$	53,384			$	313,896
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest		$	177			$	—
NONCASH ACTIVITIES
Issuance of common stock for accrued expenses		$	37,500			$	—
Debt issuance cost netted to proceeds from note payable			9,250				—

See notes to condensed consolidated financial statements

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

A. THE COMPANY

References to the “Company” in this Form 10-Q refer to Veritec, Inc. (“Veritec”) and its wholly owned subsidiaries VCode Holdings, Inc. (“VCode”) and Veritec Financial Systems, Inc. (“VTFS”).

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 three month period ended September 30, 2009, are not necessarily indicative of the results that may be expected for the year ended June 30, 2010. 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, 2009. The Condensed Consolidated Balance Sheet as of June 30, 2009 was derived from the audited consolidated financial statements as of such 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, VCode, and VTFS. All inter-company transactions and balances were eliminated in consolidation.

C. NATURE OF BUSINESS

The Company is primarily engaged in the development, marketing, sales and licensing of products and rendering of professional services related thereto in the following two fields of technology: (1) proprietary two-dimensional matrix symbology (also commonly referred to as “two-dimensional barcodes” or “2D barcodes”), and (2) mobile banking solutions.

In this Form 10-Q, the Company’s two-dimensional matrix symbology technology will hereafter be referred to as the Company’s “Barcode Technology”, and the Company’s mobile banking technology will hereafter be referred to as its “Mobile Banking Technology”.

The Company’s Barcode Technology was originally invented by the founders of Veritec under United States patents 4,924,078, 5,331,176, 5,612,524 and 7,159,780. Our principal licensed product to date that contains our VeriCode^® Barcode Technology has been a product identification system for identification and tracking of manufactured parts, components and products. The VeriCode^® symbol is a two-dimensional high data density machine-readable symbol that can contain up to approximately 500 bytes of data.

The Company’s VSCode^® Barcode Technology is a derivative of the VeriCode^® symbol with the ability to encrypt a greater amount of data by increasing data density. The VSCode^® is a data storage “container” that offers a high degree of security and which can also be tailored to the application requirements of the user. The VSCode^® symbol can hold any form of binary information that can be digitized, including numbers, letters, images, photos, graphics, and the minutia for biometric information, including fingerprints and facial image data, to the extent of its data storage capacity, that are likewise limited by the resolution of the marking and reading devices employed by the user. VSCode^® is ideal for secure identification documents (such as national identification cards, drivers licenses, voter registration cards), financial cards, medical records and other high security applications.

In its PhoneCodes™ product platform, Veritec developed software to send, store, display, and read a VeriCode^® Barcode Technology symbol on the LCD screen of a mobile phone. With the electronic media that provide the ease of transferring information over the web, Veritec’s PhoneCodes™ technology enables individuals and companies to receive or distribute gift certificates, tickets, coupons, receipts, or engage in banking transactions using the VeriCode^® technology via wireless phone or PDA.

On January 12, 2009, Veritec formed VTFS, a Delaware corporation, to bring its Mobile Banking Technology, products and related professional services to market. In May 2009 Veritec was registered by Security First Bank in Visa’s Third Party Registration Program as a Cardholder Independent Sales Organization and Third-Party Servicer. As a Cardholder Independent Sales Organization, Veritec may promote and sell Visa branded card programs. As a Third-Party Servicer, Veritec provides back-end cardholder transaction processing services for Visa branded card programs on behalf of Security First Bank.

Our VeriSuite™ card enrollment system was released in July 2009. The VeriSuite™ system is a user friendly and cost effective solution that gives governments and businesses the ability to provide cardholders with an identity card containing Veritec’s VSCode^® Barcode Technology. The VeriSuite™ system provides secure Bio-ID Cards such as citizen identification, employee cards, health benefit cards, border control cards, financial cards, and more.

The Company has a portfolio of five United States and eight foreign patents. In addition, we have seven U.S. and twenty-eight foreign pending patent applications.

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 the following three separate categories: license revenue (Barcode Technology), hardware revenue, and identification card services 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 collection is reasonably assured, revenue is recognized.

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.

E. NET LOSS PER COMMON SHARE

Basic net loss per common share is computed by dividing the loss available to common stockholders by the weighted-average number of common shares outstanding. Diluted net loss per common share, in addition to the weighted-average number of common shares outstanding determined for basic net 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 15,755,849 and 15,115,088 for the three months ended September 30, 2009 and 2008, respectively. Potentially dilutive instruments include stock options, warrants, preferred stock, convertible notes payable, and stock compensation (Note F and G). For the three months ended September 30, 2009, unvested restricted shares (525,000 common shares), stock options (819,249 common shares), warrants (275,000 common shares), convertible notes payable (1,089,697 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 three months ended September 30, 2008, stock options (296,749 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.

F. NOTES PAYABLE

During the quarter ended September 30, 2009, the Company borrowed a total of $535,750, net of repayment of $20,000 in the same quarter, with annual interest at 8%, as follows: (i) $485,750 consists of loans made to the Company by The Matthews Group, a related party that is owned and controlled by Larry Johanns, a significant Company shareholder, and Van Tran, the Chairman of the Board, consisting of a $1,500 note which is convertible into common stock at $0.33 per share, due July 2010; a $100,000 unsecured note that is due on demand; and a $384,250 note that is secured by a security interest in the Company’s intellectual property, and due in August 2010; and (ii) a $50,000 note due to an unrelated party and convertible into common stock at $1.00 per share, subject to board of directors approval, due in November 2009.

In October 2009, the Board of Directors approved the issuance of 70,000 shares of common stock upon the conversion in full of a $70,000 note payable to an unrelated party.

Subsequent to the quarter ended September 30, 2009, the Company borrowed $200,000 from The Matthews Group at 8% annual interest, maturing November 2010. The note is secured by all of the Company’s intellectual property and is convertible into the Company’s common stock at the rate of one share for every $0.25 loaned.

G. STOCK-BASED COMPENSATION

The Company has agreements with certain of its employees and independent contractor consultants that provide grants of options to purchase the Company’s common stock.

The Company also has agreements with one employee and one consultant that provide for five years of annual grants of options on each anniversary date. 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 expire five years after vesting. As of September 30, 2009, the Company has commitments to the employee and consultant to grant options to acquire 10,000 shares of the Company’s common stock for fiscal year 2011.

A summary of outstanding stock options is as follows:

		Number
		of				Weighted — Average
		Shares				Exercise Price
Outstanding at June 30, 2009			721,749			$	0.49
Granted			97,500			$	0.38
Outstanding at September 30, 2009			819,249			$	0.48

The weighted-average remaining contractual life of stock options outstanding at September 30, 2009 is 4.6 years.

The weighted-average fair value of options granted for the three months ended September 30, 2009 and 2008 was $0.34 and $0.14, respectively. Stock-based compensation expense was $34,634 and $1,171 during the three months ended September 30, 2009 and 2008, respectively. As of September 30, 2009, there was $41,227 of unrecognized compensation costs related to stock options. These costs are expected to be recognized over the next four quarters.

On December 5, 2008, the Company’s Board of Directors granted Mr. Hattara 1,000,000 restricted shares of the Company’s common stock and granted Mr. Thomas McPherson, the Company’s Vice President, General Counsel and Secretary 50,000 restricted shares of the Company’s common stock. The shares for both individuals were valued at the fair market price for December 5, 2008 of $0.30 per share. Of the 1,050,000 shares of common stock, 525,000 shares vested on June 5, 2009 and the remainder vest on December 5, 2009. The total compensation expense for these arrangements was $78,750 for the three months ended September 30, 2009.

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.

In October 2009, the Company granted options to acquire 50,000 shares of the Company’s common stock to two consultants.

The Company’s Board of Directors had 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. As of September 30, 2009, stock and stock options totaling 399,249 have been committed and are outstanding under this authorization.

H. GOING CONCERN

The accompanying condensed financial statements have been prepared assuming the Company will continue as a going concern. At September 30, 2009, the Company has $53,384 and ($1,776,824) of cash and working capital deficit, respectively. The Company believes its cash and forecasted cash flow from operations will not be sufficient to continue operations through fiscal 2010 without continued external investment. The Company believes it will require additional funds to continue its operations through fiscal 2010 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 condensed consolidated financial statements do not include any adjustments that may result from this uncertainty.

I. RECENTLY ISSUED ACCOUNTING STANDARD

In April 2008, the FASB issued FSP FAS 142-3, Determination of the Useful Life of Intangible Assets (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”). The intent of this FSP FAS 142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141R (revised 2007), Business Combinations, and other generally accepted accounting principals. FSP FAS 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The adoption of FSP FAS 142-3 did not to have a material impact on the Company’s financial position or results of operations.

In June 2009, the FASB issued SFAS No. 168, The “FASB Accounting Standards Codification” and the Hierarchy of Generally Accepted Accounting Principles. This standard replaces SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles, and establishes only two levels of U.S. generally accepted accounting principles (“GAAP”), authoritative and non-authoritative. The FASB Accounting Standards Codification (the “Codification”) will become the source of authoritative, nongovernmental GAAP, except for rules and interpretive releases of the Securities and Exchange Commission (“SEC”), which are sources of authoritative GAAP for SEC registrants. All other non-grandfathered, non-SEC accounting literature not included in the Codification will become non-authoritative. This standard is effective for financial statements for interim or annual reporting periods ending after September 15, 2009. As the Codification was not intended to change or alter existing GAAP, it will not have any impact on the Company’s consolidated financial statements.

J. SUBSEQUENT EVENTS

In October 2009, the Company’s board of directors approved a request from the Company’s President and CEO, Jeffrey Hattara, to terminate 150,000 non-vested stock options that were previously granted to him in order to make shares available to the Company for its future use. David Reiling, a board member, resigned subsequent to the quarter ended September 30, 2009 and voluntarily relinquished his non-issued 50,000 shares of restricted common stock granted to him.

In October 2009, the Company also signed a consulting agreement with an entity for a period of 12 months. The financial commitment under this consulting agreement is $4,000 and 41,667 restricted shares of the Company’s common stock per month, with a total potential financial commitment over the full 12 month term of $48,000 and 500,000 shares of the Company’s common stock. Either party may terminate the consulting agreement at any time, without cause, upon written notice to the other.

Management has evaluated subsequent events through November 16, 2009, the filing date of this quarterly report on Form 10-Q.

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

Results of Operations — September 30, 2009 compared to September 30, 2008

We had a net loss of $710,460 for the three months ended September 30, 2009 compared to a net loss of $50,474 for the three months ended September 30, 2008.

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 September 30, 2009, license and other revenue was $200,641 compared to $432,532 for the three months ended September 30, 2008, a decrease of $231,891. The license and other revenue decrease are attributable to the decline in 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 continues to experience decline in demand for product identification product licenses in the LCD industry. The decrease is a result of various customers purchasing less than in the three months ended September 30, 2008.

Cost of Goods Sold

Cost of sales for the three months ended September 30, 2009, totaled $159,459 and for the three months ended September 30, 2008, cost of sales were $63,596, an increase of $95,863. The increase in cost of sales for the three months ended September 30, 2009 was the result of cost of maintaining the Company’s data processing center for its mobile banking operations, which made up 88% of the total cost of sales compared to none in the quarter ended September 30, 2008. This increase was however offset by a reduction in the cost of licenses sold during the quarter and maintenance services, which decreased, by $44,243 over the three months ended September 30, 2008.

Operating Expenses

Research and development expense for the three months ended September 30, 2009 totaled $188,005 versus $99,095 for the three months ended September 30, 2008. The increase of $88,910 was principally the result of increased engineering payroll expense and related employer taxes that increased by $72,539 from the Company’s mobile banking operations, which was not operational during the three month ended September 30, 2008. The remaining $16,370 increase was due to the development of loyalty program for the mobile banking operations.

Sales and marketing expense for the three months ended September 30, 2009 were $48,931 compared to $37,146 for the three months ended September 30, 2008, an increase of $11,785. For the three months ended September 30, 2009, the Company had one direct sales staff, accounting for $27,585 of cost increases compared to no sales staff for the same three month period ended September 30, 2008. The Company, for the three months ended September 30, 2009, paid out commissions of $162 compared to $13,033 for the three month period ended September 30, 2008.

General and administrative expenses for the three months ended September 30, 2009 were $487,480 compared to $284,230 for the three months ended September 30, 2008, an increase of $203,250 over the three months ended September 30, 2008. The increase was mainly the result of increases in most of the expenditures for the three months ended September 30, 2009 compared to the three months ended September 30, 2008. Rent expense was higher by $11,500 due to the Company renting two housing units for guests and leasing of additional office space for the three months ended September 30, 2009. The Company saw increases of $44,450 in payroll expense, $112,213 in stock compensation expense, $10,426 in employer payroll taxes, $10,261 in health insurance costs, and $17,588 in public company fees, over the same three months ended September 30, 2008. The increased payroll and stock compensation related mainly to compensation for officers who commenced their employment in December 2008.

Other Income (Expense)

Interest income for the three months ended September 30, 2009 was $29 compared to $1,061 for the three months ended September 30, 2008 a decrease of $1,032. The decrease was a result of the Company’s need for cash to fund the operations, thus drawing down cash reserves and in doing so earning less interest. Interest expense for the three months ended September 30, 2009 was $27,255 compared to $0 in the same period ended September 30, 2008. The increase was the result of issuance of notes payable.

Liquidity

At September 30, 2009, the Company has $53,384 and ($1,850,424) of cash and working capital deficit, respectively. Subsequent to the quarter ended September 30, 2009, the Company borrowed $200,000 from The Matthews Group at 8% annual interest, maturing November 2010. The note is secured by all of the Company’s intellectual property and is convertible into the Company’s common stock at the rate of one share for every $0.25 loaned.

The Company believes it will require additional funds to continue its operations through fiscal 2010 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 $50,400 for the corporate office building. The office building is leased from the Company’s Executive Chairman, Van Tran, and 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 2.75 year lease commitment is $138,600. The Company also has month-to-month leases for corporate housing at 1300 Hillsboro, Golden Valley, Minnesota and 2415 Winnetka Ave. N., Golden Valley, Minnesota, which are leased from Larry Johanns, a principal of The Matthews Group, LLC, and significant shareholder of the Company. The monthly lease obligations are $1,000 and $1,200, respectively.

Our subsidiary, VTFS, entered into a twelve-month processing center contract beginning February 1, 2009, with monthly commitments of approximately $34,200.

In the quarter the Company also signed a consulting agreement with an entity for a period of 12 months. The financial commitment under this consulting agreement is $4,000 and 41,667 restricted shares of the Company’s common stock per month, with a total potential financial commitment over the full 12 month term of $48,000 and 500,000 shares of the Company’s common stock. Either party may terminate the consulting agreement at any time, without cause, upon written notice to the other.

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 the following three separate categories: license revenue (Barcode Technology), hardware revenue, and identification card services 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 collection is reasonably assured, revenue is recognized.

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 September 30, 2009, 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/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/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.

The material weaknesses relate to limited transitional oversight from a newly formed audit committee on the external financial reporting process and internal controls over financial reporting, lack of segregation of duties, and management failure to fully address auditors’ management letter comments. Under the segregation of duties issues, the Controller was the sole preparer of the financial statements and periodic SEC reports with limited separate independent detailed review to prevent material errors. Also the CEO has had authority to enter into significant contracts, as well as authority to sign checks, which could result in material fraud.

In order to mitigate these material weaknesses to the fullest extent possible, the Company has assigned its newly formed audit committee with oversight responsibilities. Financial statements, periodic SEC reports and monthly bank statement and imaged checks are continuously reviewed by the Controller, CEO/CFO and Executive Chair. In addition all significant contracts are now being reviewed and signed off by the Company’s in-house attorney in conjunction with the CEO and the Executive Chair. The audit committee will work with management to address and respond to all the auditors’ management letter comments.

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

From time to time, we are involved in various legal actions arising in the ordinary course of business. In the opinion of our management, the ultimate dispositions of these matters will not have a material adverse effect on our consolidated financial position and results of operations. Currently, there are no significant legal matters pending.

ITEM 1A		RISK FACTORS

There have been no material changes to our risk factors and uncertainties during the three months ended September 30, 2009. 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, 2009.

ITEM 6		EXHIBITS

	31.1			CEO Certification required by Rule 13a14(a)/15d14(a) under the Securities Exchange Act of 1934.
	31.2			CFO Certification required by Rule 13a14(a)/15d14(a) under the Securities Exchange Act of 1934.
	32.1			Veritec, Inc. Certification of CEO/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		November 16, 2009
		President, Chief Executive Officer and Interim Chief Financial Officer
By		/s/ Van Tran		November 16, 2009
		Van Tran
		Executive Chairman of the Board