VERITEC INC - Quarter Report: 2010 March (Form 10-Q)

veritec10q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM l0-Q

(Mark One)

[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934

for the quarterly period ended MARCH 31, 2010

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

for the transition period from ________________ to ___________________.

Commission File Number. 0-15113

VERITEC, INC.

(Exact name of Registrant as Specified in its Charter)

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 [ X ] No [ ]

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 [ ] No [ ]

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 [ ]	Accelerated filer [ ]	Non-accelerated filer [ ]	Smaller reporting company [ X ]
		(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 [ ] No [ X ]

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 [ X ] No [ ]

As of March 31, 2010, there were 15,920,088 shares of the issuer’s common stock outstanding.

		VERITEC, INC.
		FORM 10-Q
		FOR THE FISCAL QUARTER ENDED MARCH 31, 2010
		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	11
	ITEM 3	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT	13
		MARKET RISK
	ITEM 4T	CONTROLS AND PROCEDURES	14

PART II			14
	ITEM 1	LEGAL PROCEEDINGS	14
	ITEM 1A	RISK FACTORS	14
	ITEM 6	EXHIBITS.	14
		SIGNATURES	14

		PART I

ITEM 1	FINANCIAL STATEMENTS

		VERITEC, INC. AND SUBSIDIARIES
		CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31,				June 30,
	2010				2009
ASSETS		(Unaudited)

Current Assets:
Cash	$	18,606			$	50,019
Accounts receivable, net of allowance of $8,400		37,159				28,376
Notes receivable		10,000				--
Inventories		7,436				6,217
Prepaid expenses		29,906				23,281
Employee advances		5,637				8,500
Total Current Assets		108,744				116,393

Property and Equipment, net of accumulated depreciation of $177,681 and $139,984		55,595				93,292
Patent costs		43,756				43,756

Total Assets	$	208,095		$		253,441

LIABILITIES AND STOCKHOLDERS’ DEFICIT

Current Liabilities:
Notes payable	$	1,825,153		$		20,039
Accounts payable		493,589				187,368
Payroll tax liabilities		45,204				--
Accrued expenses		229,526				353,161
Total Current Liabilities		2,593,472				560,568

Notes Payable, net of current portion		--				885,673

Commitments and Contingencies

Stockholders’ Deficit:
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, 15,920,088 and 16,165,088 shares issued		159,201				161,651
Additional paid-in capital		14,280,482				13,943,046
Accumulated deficit		(16,826,060	)			(15,298,497	)
Total Stockholders’ Deficit		( 2,385,377	)			( 1,192,800	)

Total Liabilities and Stockholders’ Deficit	$	208,095		$		253,441

See notes to condensed consolidated financial statements

VERITEC, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three months ended March 31,
	2010			2009

License and other revenue	$	318,963		$	75,672
Cost of Sales		150,962			105,697
Gross Profit		168,001			(30,025)

Operating Expenses:
Selling, general and administrative		216,139			545,200
Research and development		115,195			138,446
Total Operating Expenses		331,334			683,646

Loss from Operations		(163,333	)		(713,671	)

Other Income(Expense):
Interest income		--			1,701
Interest expense		(37,926	)		(4,555)
Total Other Income(Expense)		(37,926	)		(2,854)

Net Loss	$	(201,259	)	$	(716,525	)

Loss Per Common Share,
Basic and Diluted	$	(0.01	)	$	(0.05	)

Weighted Average Number of Shares Outstanding,
Basic and Diluted			15,868,190				15,115,088

See notes to condensed consolidated financial statements

VERITEC, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Nine months ended March 31,
	2010			2009

License and other revenue	$	638,621		$	776,531
Cost of Sales		439,846			233,644
Gross Profit		198,775			542,887

Operating Expenses:
Selling, general and administrative		1,171,087			1,121,632
Research and development		455,176			372,819
Total Operating Expenses		1,626,263			1,494,451

Loss from Operations		(1,427,488	)		(951,564	)

Other Income(Expense):
Interest income		30			3,653
Interest expense		(100,105	)		(4,555)
Total Other Income(Expense)		(100,075	)		(902)

Net Loss	$	(1,527,563	)	$	(952,466	)

Loss Per Common Share,
Basic and Diluted	$	(0.09	)	$	(0.06	)

Weighted Average Number of Shares Outstanding,
Basic and Diluted			16,126,876				15,115,088

See notes to condensed consolidated financial statements

VERITEC, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT

(Unaudited)

`											Additional
	Preferred Stock				Common Stock						Paid-in		Accumulated
	Shares		Amount		Shares			Amount			Capital		Deficit			Total
Balance, July 1, 2009		1,000	$	1,000		16,165,088		$	161,651		$	13,943,046	$	(15,298,497	)	$	(1,192,800	)
Stock Based Compensation												73,536					73,536
Shares Issued for Services						85,000			850			153,100					153,950
Shares Issued for Accrued Expenses						150,000			1,500			36,000					37,500
Conversion of Notes Payable						70,000			700			69,300					70,000
Shares Returned						(550,000	)		(5,500	)		5,500					-
Net Loss for the Period		-		-		-			-			-		(1,527,563	)		(1,527,563	)
Balance, March 31, 2010		1,000	$	1,000		15,920,088		$	159,201		$	14,280,482	$	(16,826,060	)	$	(2,385,377	)

See notes to condensed consolidated financial statements

VERITEC, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine months ended March 31,
	2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(1,527,563	)	$	(952,466	)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation		37,697			32,807
Amortization of discount on notes payable		17,894			800
Fair value of stock options issued to employees		73,536			34,030
Fair value of stock issued for services		153,950			117,584
Interest accrued on notes payable		89,588			3,755
Changes in operating assets and liabilities:
Accounts receivable		(8,783	)		(6,932)
Inventories		(1,219	)		22,122
Employee advances		2,862			--
Prepaid expenses		(6,625)			(1,200	)
Accounts payables and accrued expenses		265,290			67,613

Net cash used by operating activities		(903,373	)		(681,887	)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment		--			(47,475	)
Issuance of note receivable		(10,000)			--
Net cash used by investing activities		(10,000)			(47,475)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable		946,960			450,000
Payments on notes payable		(65,000)			--
Net cash provided by financing activities		881,960			450,000

NET DECREASE IN CASH		(31,413)			(279,362	)
CASH AT BEGINNING OF PERIOD		50,019			334,702
CASH AT END OF PERIOD	$	18,606		$	55,340

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest	$	536		$	--

NONCASH ACTIVITIES
Issuance of common stock for accrued expenses	$	37,500		$	--
Issuance of common stock in repayment of note payable		70,000			--
Issuance of warrants for notes payable		--			17,082

See notes to condensed consolidated financial statements

Table of Contents

VERITEC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Nine Months Ended March 31, 2010 and 2009 (Unaudited)

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 and nine month periods ended March 31, 2010, are not necessarily indicative of the results that may be expected for the year ending 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 preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

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. GOING CONCERN

The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. During the nine months ended March 31, 2010, the Company had a net loss of $1,527,563 and used cash in operations of $903,373. At March 31, 2010, the Company had a working capital deficit of $2,484,728 and a stockholders’ deficiency of $2,385,377. The Company is also delinquent in payment of certain amounts due of $45,204 for payroll taxes as of March 31, 2010. 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.

D. 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, driver’s licenses, and 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.

E SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition:

The Company accounts for revenue recognition in accordance with accounting standards. 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.

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 15,868,190 and 15,115,088 for the three months ended March 31, 2010, and 2009, respectively. The weighted average shares outstanding were 16,126,876 and 15,115,088 for the nine months ended March 31, 2010, and 2009, respectively. Potentially dilutive instruments include stock options, warrants, preferred stock, and convertible notes payable (Note E and F). For the nine months ended March 31, 2010, stock options (814,249 common shares), warrants (275,000 common shares), convertible notes payable (4,346,987 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 nine months ended March 31, 2009, stock (1,050,000 restricted common shares), stock options (731,749 common shares), warrants (225,000 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.

Concentrations

The Company’s cash balances on deposit with banks are guaranteed by the Federal Deposit Insurance Corporation up to $250,000. The Company may be exposed to risk for the amounts of funds held in one bank in excess of the insurance limit. In assessing the risk, the Company’s policy is to maintain cash balances with high quality financial institutions. The Company had no cash balances in excess of the guarantee during the three and nine months ended March 31, 2010.

During the nine months ended March 31, 2010 and 2009, the Company had four customers that accounted for approximately 10%, 11%, 22%, and 25% of sales in 2010, and three customers that accounted for approximately 11%, 17%, and 36% of sales in 2009, respectively. During the three months ended March 31, 2010, and 2009, the Company had three customers that accounted for approximately 13%, 18%, and 33% of sales in 2010, and four customers of which two of the customers accounted for approximately 13% each and the remaining customers accounted for approximately 17% and 39% of the sales in 2009. No other customers accounted for more than 10% of sales in either year. As of March 31, 2010 and June 30, 2009, the Company had approximately $26,650 (58%) and $6,050 (13%) and $15,000 (41%) and $7,499 (20%), respectively, of accounts receivable from its major customers.

For the nine months ended March 31, 2010 and 2009, foreign revenues accounted for 82% (66% Koreas, 12% Taiwan, and 4% others) and 75% (60% Korea, 11% Japan, and 4% others) of the Company’s total revenues respectively. For the three months ended March 31, 2010 and 2009, foreign revenues accounted for 96% (84% Korea, 9% Taiwan, and 3% others) and 54% (52% Korea and 2% others) of the Company’s total revenues respectively.

Fair Value of Financial Instruments

Fair Value Measurements are adopted by the Company based on the authoritative guidance provided by the Financial Accounting Standards Board , with the exception of the application of the statement to non-recurring, non-financial assets and liabilities as permitted. The adoption based on the authoritative guidance provided by the Financial Accounting Standards Board did not have a material impact on the Company's fair value measurements. Based on the authoritative guidance provided by the Financial Accounting Standards Board defines fair value as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. FASB authoritative guidance establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair value into three broad levels as follows:

Level 1- Quoted prices in active markets for identical assets or liabilities.

Level 2- Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly.

Level 3- Unobservable inputs based on the Company's assumptions.

FASB issued authoritative guidance that requires the use of observable market data if such data is available without undue cost and effort.

Recent Accounting Pronouncements

In October 2009, the FASB issued authoritative guidance on revenue recognition that will become effective in fiscal years beginning on or after June 15, 2010, with earlier adoption permitted. Under the new guidance on arrangements that include software elements, tangible products that have software components that are essential to the functionality of the tangible product will no longer be within the scope of the software revenue recognition guidance, and software-enabled products will now be subject to other relevant revenue recognition guidance. Additionally, the FASB issued authoritative guidance on revenue arrangements with multiple deliverables that are outside the scope of the software revenue recognition guidance. Under the new guidance, when vendor specific objective evidence or third party evidence for deliverables in an arrangement cannot be determined, a best estimate of the selling price is required to separate deliverables and allocate arrangement consideration using the relative selling price method. The new guidance includes new disclosure requirements on how the application of the relative selling price method affects the timing and amount of revenue recognition. We believe the adoption of this new guidance will not have a material impact on our financial statements.

In January 2010, the FASB issued guidance on improving disclosures about fair value measurements to add new disclosure requirements for significant transfers in and out of Level 1 and 2 measurements and to provide a gross presentation of the activities within the Level 3 rollforward. The guidance also clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. The disclosure requirements are effective for interim and annual reporting periods beginning after December 15, 2009, except for the requirement to present the Level 3 rollforward on a gross basis, which is effective for fiscal years beginning after December 15, 2010. The adoption of this guidance was limited to the form and content of disclosures, and will not have a material impact on our consolidated results of operations and financial condition.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements.

F. NOTES PAYABLE

Notes payable consist of the following:

	March 31, 2010	June 30, 2009
	(UNAUDITED)
Convertible notes payable (includes $484,260 and $449,120, respectively, to related parties), unsecured, interest at 8%, due September 2010 through November 2010. The principal and accrued interest are convertible at a conversion price of $0.30. The principal and interest is due immediately on the event of default or change of control. The holders also received warrants to purchase one share of common stock for every $2 of investment. The Company recorded a $20,981 discount on the notes payable for the value of the warrants issued. The discount is being amortized over the term of the notes payable. The unamortized discount as of March 31, 2010 and June 30, 2009, was $7,127 and $17,108, respectively.	$ 589,532	$ 546,564

Convertible notes payable to related parties, unsecured, principal and interest are convertible into common stock at $0.30 to $0.33 per share, interest at 8 % to 10%, due July to November 2010.	492,766	339,109

Convertible note payable to related party, secured by the Company’s intellectual property, principal and interest are convertible into common stock at $0.25 per share subject to board of directors’ approval, interest at 8% due November 2010.	203,315	--

Note payable to related party, secured by the Company’s intellectual property, interest at 8% due August 2010	398,756	--

Notes payable to related parties, unsecured, interest at 0% to 8%, due on demand	108,414	--

Note payable, unsecured, interest at 10%, due January 2010	20,663	--

Convertible note payable, unsecured, principal and interest are convertible into common stock at $0.30 per share subject to board of directors’ approval, interest at 8%, due January 2011	10,184	--

Convertible note payable, unsecured, principal and interest are convertible into common stock at $1.00 per share subject to board of directors’ approval, interest at 8% due November 2009.	1,523	20,039

Total	1,825,153	905,712

Less: Current portion	1,825,153	20,039

Notes Payable, less current portion	$ --	$ 885,673

G. STOCK-BASED COMPENSATION

Common Stock

Shares issued for services

On December 5, 2008, the Company’s Board of Directors granted its former Chief Executive Officer, Mr. Jeffrey 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 vested on December 5, 2009. The total compensation expense for these arrangements was $131,250 for the nine months ended March 31, 2010.

On January 1, 2009, the Company signed an agreement with a consultant to receive 50,000 shares of stock and 10,000 options to acquire common stock, with each issuance subject to approval by the Board of Directors. On October 7, 2009, the Board of Directors approved issuance of 25,000 shares and nullified and terminated the remainder of the agreement. The shares were valued in the aggregate at $6,500 which was based upon the stock price of the shares on the date of board approval.

On February 23, 2010, the Company issued 60,000 shares of its common stock to one of its consultants valued at $16,200 based upon the stock price of the shares on the date of board approval.

Shares issued for settlement of accrued expenses

On July 21, 2009, the Company issued 50,000 shares of its common stock to each of its three directors (150,000 shares in the aggregate). The shares were valued in the aggregate at $37,500, based upon the stock price of the shares on the date of board approval.

Returned Shares

In October 2009 David Reiling, a board member, resigned and voluntarily relinquished 50,000 shares of restricted common stock granted to him. On December 5, 2009, Mr. Hattara resigned as CEO and agreed to return 500,000 shares of common stock previously issued to him. As the shares issued were fully vested and services had been provided to the Company under the initial share issuance agreements, upon return of the shares the Company adjusted its paid in capital for the par value of the shares issued.

Shares issued upon conversion of Debt

In October 2009, the Board of Directors approved the issuance of 70,000 shares of common stock upon the conversion in full of $70,000 of notes payable. The note was converted in accordance with the conversion terms with the debt instrument.

Stock options

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.

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
Forfeited	(5,000)	$ 0.25
Outstanding at March 31, 2010	814,249	$ 0.47

The weighted-average remaining contractual life of stock options outstanding at March 31, 2010 is 4.1 years.

During the nine months ended March 31, 2010, the Company granted to certain employees options to acquire an aggregate of 97,500 shares of common stock at exercise prices ranging from $0.25 to $0.40 per share. The options vest over a one year service period and expire 2015. The weighted-average fair value of options granted for the nine months ended March 31, 2010 and 2009 was $0.34 and $0.29, respectively. The weighted average fair value of options granted during the nine months ended March 31, 2010, was determined using a black scholes pricing model with the following assumptions: expected term of 3 years, volatility of 181% and discount rate of 2.47% to 2.69%.

Stock-based compensation expense was $8,091 and $17,913 during the three months ended March 31, 2010 and 2009, respectively. Stock based compensation expense was $73,536 and $34,030 during the nine months ended March 31, 2010 and 2009, respectively. As of March 31, 2010, there was $1,244 of unrecognized compensation costs related to stock options. These costs are expected to be recognized over the next four quarters. The options had no intrinsic value as of March 31, 2010.

Warrants

In connection with the issuance of certain convertible notes payable, the Company has outstanding 275,000 warrants to acquire its common stock at an exercise price of $2 per share. The warrants expire in 2014. The warrants have no intrinsic value at March 31, 2010.

H. SUBSEQUENT EVENTS

Subsequent to the quarter ended March 31, 2010, the Company borrowed a total of $60,500 from The Matthews Group, a related party (an entity owned by our current CEO and Board member, Van Tran, and Larry Johanns, a significant Company shareholder) at 8% annual interest, due on demand. The note is convertible into the Company’s common stock at the rate of one share for every $0.30 of indebtedness.

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

Results of Operations – March 31, 2010 compared to March 31, 2009

We had a net loss of $201,259 for the three months ended March 31, 2010, compared to a net loss of $716,525 for the three months ended March 31, 2009. For the nine months ended March 31, 2010, we had a net loss of $1,527,563 compared to a net loss of $952,466 for the nine months ended March 31, 2009.

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 March 31, 2010, license and other revenue was $318,963 compared to $75,672 for the three months ended March 31, 2009, an increase of $243,291. The license and other revenue increases are attributable to the increase in demand for LCD screens in the third quarter. Revenues from the LCD market remain unpredictable as they are generated when customers open new production facilities or update production equipment; however, in the three months ended March 31, 2010, the Company experienced a slight increase in demand for product identification product licenses in the LCD industry. The increase is a result of various customers purchasing more in the current period than in the three months ended March 31, 2009. For the nine months ended March 31, 2010, and 2009, license and other revenue was $638,621 and $776,531, respectively. The decrease was due to a decline in LCD screen demand.

Cost of Goods Sold

Cost of sales for the three months ended March 31, 2010 totaled $150,962 and for the three months ended March 31, 2009, cost of sales were $105,697, an increase of $45,265. The increase in cost of sales for the three months ended March 31, 2010, was the result of the cost of maintaining the Company’s data processing center for its mobile banking operations, which made up 82% of the total cost of sales in the current period compared to 49% in the quarter ended March 31, 2009. This increase was partially offset by a reduction in the cost of licenses sold during the quarter and maintenance services, which decreased by $26,593 over the three months ended March 31, 2009. For the nine months ended March 31, 2010, the cost of sales totaled $439,846 compared to the nine months ended March 31, 2009, of $233,644. The net increase of $206,202 was mainly due to maintaining the Company’s data processing center for its mobile banking operations. This increased cost was partially offset by a reduction of $85,420 in the cost of licenses.

Operating Expenses

Research and development expense for the three months ended March 31, 2010, totaled $115,195 versus $138,446 for the three months ended March 31, 2009. The decrease of $23,251 was principally the result of reduction in consulting costs that decreased by $40,313 and travel expense that decreased by $7,603. This reduction was partially offset by a $23,439 increase in payroll cost. For the nine months ended March 31, 2010, research and development costs were $455,176 compared to $372,819 for the nine months ended March 31, 2009, a difference of $82,357. For the nine months ended March 31, 2010, engineering payroll costs increased by $147,610 due to the Company’s mobile banking operations. This increase was partially offset by $84,948 reduction in consulting cost in response to declining revenues.

Sales and marketing expense for the three months ended March 31, 2010 were $35,670 compared to $17,530 for the three months ended March 31, 2009, an increase of $18,140. For the three months ended March 31, 2010, the Company had one direct sales staff person, accounting for $21,213 of cost increases. The Company, for the three months ended March 31, 2010, paid out commissions of $314 compared to $270 for the three month period ended March 31, 2009. Sales and marketing expense for the nine months ended March 31, 2010 were $125,353 compared to $63,069 for the nine months ended March 31, 2009 a difference of $62,284. For the nine months ended March 31, 2010, the Company had one direct sales staff that accounted for $86,813 increased payroll costs compared to the same nine months period ended March 31, 2009. The increased cost was offset by reduction in commissions of $12,914 and $8,651 in consulting cost.

General and administrative expenses for the three months ended March 31, 2010 were $180,469 compared to $527,670 for the three months ended March 31, 2009, a reduction of $347,201 over the three months ended March 31, 2009. The reduction was mainly the result of decreases in most of the expenditures for the three months ended March 31, 2010, compared to the three months ended March 31, 2009. Payroll expense decreased by $43,727 due to reduction in staff levels. The Company also saw decreases of $104,690 in stock compensation, $13,677 in health insurance cost, $66,350 in professional fees, and $110,885 in bad debt expense over the three months ended March 31, 2009. For the nine months ended March 31, 2010, general and administrative expenses were $1,045,734 versus $1,058,563 for the nine months ended March 31, 2009, a decrease of $12,829. The decrease was the result of lower professional fees of $103,623 and bad debt expense of $111,023. These decreases were offset by increases in payroll cost of $34,030, stock compensation of $75,872, consulting cost of $15,233, rent expense of $12,565 and public companies fees of $37,652.

Other Income (Expense)

Interest income for the three months ended March 31, 2010 was $0 compared to $1,701 for the three months ended March 31, 2009 a decrease of $1,701. The decrease was a result of the Company’s need for cash to fund its operations, thus drawing down cash reserves and in doing so earning no interest. Interest expense for the three months ended March 31, 2010, was $37,926 compared to $4,555 in the same period ended March 31, 2009. The increase was the result of issuance of notes payable. For the nine months ended March 31, 2010, and 2009, interest income was $30 and $3,653, respectively. The decrease was a result of the Company’s need for cash to fund operations, thus drawing down cash reserves and so doing earning less interest. For the nine months ended March 31, 2010, and 2009, interest expense was $100,105 and $4,555, respectively. The increase was the result of issuance of notes payable.

Liquidity

The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. During the nine months ended March 31, 2010, the Company had a net loss of $1,527,563 and used cash in operations of $903,373. At March 31, 2010, the Company had a working capital deficit of $2,484,728 and a stockholders’ deficiency of $2,385,377. The Company is also delinquent in payment of certain amounts due of $45,204 for payroll taxes as of March 31, 2010. The Company’s operations are currently being supported by borrowings from affiliated parties, and its cash and forecasted cash flow from operations will not be sufficient to continue operations without continued external investment. The Company believes it will require additional funds in the near future to continue its operations 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 further 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 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.

If the Company is not successful in raising additional funds, generating sufficient revenues or implementing sufficient cost reductions, the Company may be forced to suspend or discontinue its operations or seek relief from its debt obligations under the United States Bankruptcy Code. Any of these actions is likely to result in a common stockholder’s loss of his or her complete investment in the Company’s common stock.

Recent Accounting Pronouncements

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 CEO and 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 2.25 year lease commitment is $113,400. 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 April 2010, the contract was renegotiated for a one-year term. The monthly commitment under this contract is $19,955.

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 applicable accounting standards using the modified prospective application method. Accounting guidance 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 accounting guidance. Revenues for the Company are classified into the following three separate categories: license revenue (Barcode Technology), hardware revenue, and identification card services revenue.

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 March 31, 2010, 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 4T 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.

The material weaknesses relate to limited transitional oversight from the audit committee on the external financial reporting process and internal controls over financial reporting and lack of segregation of duties. Under the segregation of duties issues, the CFO 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 audit committee with oversight responsibilities. Financial statements, periodic SEC reports and monthly bank statement and imaged checks are continuously reviewed by the CFO and CEO/Executive Chair. In addition all significant contracts are now being reviewed and signed off by the Company’s board of directors in conjunction with the CEO/Executive Chair.

Internal Control over Financial Reporting

Other than the changes described in the preceding paragraph,, 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 March 31, 2010. 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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On February 23, 2010, the Company issued 60,000 shares of its common stock to one of its consultants in exchange for services rendered. The Company issued the restricted shares in reliance on Section 4(2) under the Securities Act of 1933, based on the restrictions on the securities issued.

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/Executive Chair 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/ Van Tran	May 14, 2010
Van Tran
Chief Executive Officer and Executive Chairman of the Board


By /s/ John Quentin	May 14, 2010
John Quentin
Chief Financial Officer