VERITEC INC - Quarter Report: 2015 December (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM l0-Q

(Mark One)

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

for the quarterly period ended December 31, 2015

OR

☐  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)

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  ☒  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): 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ☐  No  ☒

As of December 31, 2015, there were 39,538,007 shares of the issuer’s common stock outstanding.

VERITEC, INC.

FORM 10-Q

FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2015

TABLE OF CONTENTS

Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q, including "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 2 of Part I of this report include forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by forward-looking statements.

In some cases, you can identify forward-looking statements by terminology such as "may," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "proposed," "intended," or "continue" or the negative of these terms or other comparable terminology. You should read statements that contain these words carefully, because they discuss our expectations about our future operating results or our future financial condition or state other "forward-looking" information. There may be events in the future that we are not able to accurately predict or control. Before you invest in our securities, you should be aware that the occurrence of any of the events described in this Quarterly Report could substantially harm our business, results of operations and financial condition, and that upon the occurrence of any of these events, the trading price of our securities could decline and you could lose all or part of your investment. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, growth rates, levels of activity, performance or achievements. We are under no duty to update any of the forward-looking statements after the date of this Quarterly Report to conform these statements to actual results.

PART I

ITEM 1 FINANCIAL STATEMENTS

VERITEC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these consolidated financial statements. 

VERITEC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2015 AND 2014
(UNAUDITED)

The accompanying notes are an integral part of these consolidated financial statements. 

VERITEC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2015 AND 2014
(UNAUDITED)

The accompanying notes are an integral part of these consolidated financial statements. 

VERITEC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIENCY

FOR THE SIX MONTHS ENDED DECEMBER 31, 2015 (Unaudited)

The accompanying notes are an integral part of these consolidated financial statements. 

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

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

The accompanying notes are an integral part of these consolidated financial statements. 

VERITEC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED DECEMBER 31, 2015 AND 2014
(UNAUDITED)

NOTE 1. NATURE OF BUSINESS

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).

The Company as primarily engaged in the development, marketing, sales and licensing of products and rendering of professional services related to the mobile banking technology as defined below. On September 30, 2015, the Company sold its barcode technology assets to a related party (See Note 7) and ceased any future sales and support efforts for this business line. Subsequent to September 30, 2015, the Company is currently focusing exclusively on its mobile banking technology business.

Mobile Banking Solutions

In 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 (ISO) and Third-Party Servicer. As a Cardholder Independent Sales Organization, Veritec was able to promote and sell Visa branded card programs. As a Third-Party Servicer, Veritec provided back-end cardholder transaction processing services for Visa branded card programs on behalf of Security First Bank. As of October 2010 the Company’s registration with Security First Bank terminated. As of April 2011 the Company signed an ISO and processor agreement with Palm Desert National Bank (which was later assigned to First California Bank) to market and process the Company’s Visa branded card program on behalf of the bank. First California Bank was sold to Pacific Western Bank in June 2013 Pacific Western Bank closed its entire debit card division and transferred its contract with VTFS to Central Bank of Kansas City. On February 5th, 2014 the entire relationship between Veritec and Pacific Western Bank ended and the new relationship with Central Bank of Kansas City began.

On December 31, 2014, Veritec ("Buyer"), and Tangible Payments LLC ("Seller"), a Maryland Limited Liability Company, entered into an Asset Purchase Agreement (the "Asset Purchase Agreement") pursuant to which Veritec acquired certain assets and liabilities of the Tangible Payments LLC (See Note 6).

Barcode Technology (Sold September 30, 2015)

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 and included products that contained our VeriCode ® Barcode Technology for identification and tracking of manufactured parts, components and products mostly in the liquid crystal display markets. On December 31, 2015, the Company sold all of its assets of its Barcode Technology, which was comprised solely of its intellectual property, to The Matthews Group, a related party (see Note 7). The sale allows the Company to focus its efforts solely on its growing Mobile Banking Technology.

Effective October 1, 2015, the Company entered into a management services agreement with the Matthews Group for which the Company will manage all facets of its previous barcode technology business, on behalf of the Matthews Group, from October 1, 2015 to May 30, 2016. Per the terms of the management services agreement, the Company earned a fee of 20% of all revenues, or $21,968, from the barcode technology business during the three and six months ended December 31, 2015. Additionally all cash flow (all revenues collected less direct costs paid) will be retained by the Company and classified as a unsecured related party note payable, due on demand, bearing interest at 10% per annum.

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.

NOTE 2. 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 six month period ended December 31, 2015 are not necessarily indicative of the results that may be expected for the year ending June 30, 2016. The Condensed Consolidated Balance Sheet as of December 31, 2015 was derived from the unaudited consolidated financial statements as of such date, but does not include all of the information and footnotes required by GAAP. 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, 2015.

The preparation of financial statements in conformity with GAAP 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. Those estimates and assumptions include estimates for reserves of uncollectible accounts, analysis of impairments of long lived assets, accruals for potential liabilities and assumptions made in valuing stock instruments issued for services.

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

NOTE 3. GOING CONCERN

The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. Such assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. During the six months ended December 31, 2015, the Company incurred a net loss of $1,077,759. At December 31, 2015, the Company had a working capital deficit of $3,100,319 and a stockholders’ deficiency of $3,092,700. In addition, as of December 31, 2015, the Company is delinquent in payment of $1,491,705 of its notes payable and is also delinquent in payment of $361,017 in payroll taxes and accrued interest and penalties.

These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent upon its ability to develop additional sources of capital and to achieve profitable operations. The Company’s independent registered public accounting firm, in their report on the Company’s financial statements for the year ending June 30, 2015, expressed substantial doubt about the Company’s ability to continue as a going concern. The Company’s financial statements do not include any adjustments that might result from the outcome of these uncertainties.

The Company believes its cash and forecasted cash flow from operations will not be sufficient to continue operations through fiscal 2016 without continued external investment. The Company will require additional funds to continue its operations through fiscal 2016 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.

NOTE 4. SIGNIFICANT ACCOUNTING POLICIES

Net Loss per Common Share:

Basic earnings (loss) per share are computed by dividing the net income (loss) applicable to Common Stockholders by the weighted average number of shares of Common Stock outstanding during the year. Diluted earnings (loss) per share is computed by dividing the net income (loss) applicable to Common Stockholders by the weighted average number of common shares outstanding plus the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued, using the treasury stock method. Potential common shares are excluded from the computation as their effect is antidilutive.

For the six months ended December 31, 2015 and 2014, the calculations of basic and diluted loss per share are the same because potential dilutive securities would have an anti-dilutive effect.

As of December 31, 2015 and 2014, we excluded the outstanding securities summarized below, which entitle the holders thereof to acquire shares of common stock, from our calculation of earnings per share, as their effect would have been anti-dilutive.

Revenues

During the three months ended December 31, 2015 and 2014, the Company had three customers that accounted for approximately 24%, 19%, and 16% of sales in 2015 and four customers that accounted for approximately 19%, 15%, 11% and 10% of sales in 2014, respectively. No other customers accounted for more than 10% of sales in either period.

During the six months ended December 31, 2015 and 2014, the Company had no customers that accounted for more than 10% of sales in 2015 and three customers that accounted for approximately 21%, 11% and 10% of sales in 2014, respectively. No other customers accounted for more than 10% of sales in either period.

Foreign Revenues

For the three months ended December 31, 2015 and 2014, foreign revenues accounted for 0% and 34% (17% Taiwan, 9% China, and 8% other) of the Company’s total revenues, respectively.

For the six months ended December 31, 2015 and 2014, foreign revenues accounted for 45% (14% Taiwan, 12% China, and 19% other) and 39% (17% Taiwan, 10% Korea, 8% China, and 4% other) of the Company’s total revenues, respectively.

Accounts Receivable

As of December 31, 2015, the Company had approximately $6,000 (30%), $4,090 (20%), $3,000 (15%) and $3,000 (15%) respectively, of accounts receivable due from its major customers. As of June 30, 2015, the Company had approximately $6,025 (16%), $5,650 (15%), and $4,575 (12%) of accounts receivable due from its major customers

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 is a comprehensive revenue recognition standard that will supersede nearly all existing revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted only in annual reporting periods beginning after December 15, 2016, including interim periods therein. Entities will be able to transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. The Company is in the process of evaluating the impact of ASU 2014-09 on the Company’s financial statements and disclosures.

In June 2014, the FASB issued Accounting Standards Update No. 2014-12, Compensation – Stock Compensation (Topic 718). The pronouncement was issued to clarify the accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The pronouncement is effective for reporting periods beginning after December 15, 2015. The adoption of ASU 2014-12 will not have a significant impact on the Company’s consolidated financial position or results of operations.

In November 2015, the FASB issued Accounting Standards Update No. 2015-17, Income Taxes: Balance Sheet Classification of Deferred Taxes, which requires an entity to present all deferred tax assets and liabilities as non-current in a classified balance sheet. This guidance allows for adoption on either a prospective or retrospective basis. The update becomes is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted. As of December 31, 2015, the Company has elected to early adopt this accounting standards update on a prospective basis.

Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements. 

NOTE 5. RESTRICTED CASH

The Company entered into Store Value Prepaid Card Sponsorship Agreements (the “Agreement”) with certain banks whereas the Company markets and sells store value prepaid card programs (the “Programs”). The Programs are marketed and managed daily at the direction of the Bank, for which the Company receives a transaction fee. In connection with the agreements the Company is required to establish a Reserve Account controlled by the Bank. At December 31, 2015 and June 30, 2015, the restricted cash totaled $49,950 and $63,029, respectively. Since this amount is restricted for the purposes related to the Programs, it is classified as restricted cash on the consolidated balance sheets.

NOTE 6. ACQUISITION

On December 31, 2014, the Company and Tangible Payments LLC, a Maryland Limited Liability Company, entered into an Asset Purchase Agreement pursuant to which the Company acquired certain assets and liabilities of Tangible Payments LLC. Tangible Payments LLC is a combined-solution software package that incorporates features the market is currently purchasing as an individual-solutions product that requires integrated services at an additional cost. With a one-stop package, Tangible’s Payments LLC solution eliminates costs and reduces deployment time.

The purchase price for the acquisition was comprised of 250,000 shares of restricted common stock of Veritec valued at $37,500, issued on closing, and an earnout payment of $155,000 for an aggregate purchase price of $192,500. The earnout payment is payable on a monthly basis from the net profits derived from the acquired assets commencing three months after the closing. The earnout payment is accelerated and the balance of the earnout payment shall be due in full at such time as Veritec receives equity investments aggregating $1.3 million.

The Company assigned $192,500 of the purchase price to contract commitments which will be amortized over a three year period. During the three and six months ended December 31, 2015 and 2014, the Company recorded $16,042, $32,083 and $16,042 and $16,042 of amortization expense, respectively.

The following table presents our unaudited pro forma combined historical results of operations for the three and six months ended December 31, 2014 as if we had consummated the acquisition as of July 1, 2014.

NOTE 7. NOTES PAYABLE

Notes payable includes accrued interest and consists of the following as of December 31, 2015 and June 30, 2015:

During the three and six months ended December 31, 2015 and 2014, the Company recorded interest on its convertible notes payable and promissory notes of $53,997 and $75,139, and $45,565 and $91,313, respectively.

(1) On September 30, 2015, the Company agreed to convert $1,775,433 of various notes payable to The Matthews Group into 22,122,919 shares of common stock, or $0.08 per share. The Matthews Group is owned 50% by Ms. Van Tran, the Company’s CEO/Executive Chair and a director, and 50% by Larry Johanns, a significant stockholder of the Company (see Note 10). The transaction included $670,038 of notes payable that were converted at less than their stated conversion prices which ranged from $0.10 per share to $0.33 per share. The Company determined this was an induced conversion and calculated an inducement expense of $452,770, which represents the fair value of the additional number of common shares issued as a result of the lower conversion price. The Company recorded the $452,770 in interest expense and finance costs and additional paid in capital. No similar expense occurred during the same period of the prior year.

(2) On September 30 2015, the Company sold its Barcode Technology assets to The Matthews Group for $670,000 in settlement of various notes payables due to The Matthews Group. The cost basis of the Barcode Technology assets were zero, resulting in a gain of $670,000. As the transaction was between the Company and The Matthews Group, a related party, the Company accounted for the gain as a capital contribution.

(3) On September 28, 2015, the Company agreed to replace a convertible note payable for $200,000 due The Matthews Group that was in default (the original note) with another convertible note payable for $200,000 due to the Matthews Group (the replacement note). The original note was for $200,000, secured, 8% interest rate, and convertible into common stock at a rate of $0.25 per share. The replacement note is for $200,000, unsecured, 10% interest rate, and convertible into common stock at a rate of $0.08 per share. The Company determined that the change in the fair value of the conversion option was more than 10% of the carrying value of the original note and recorded a loss on extinguishment of $136,000. The $136,000 is included in interest expense and finance costs and additional paid in capital. No similar expense occurred during the same period of the prior year.

For the purposes of Balance Sheet presentation notes payable have been presented as follows:

NOTE 8 - STOCKHOLDERS’ DEFICIENCY

Common Stock to be issued

On July 15, 2014, the Company entered into a "Consulting Agreement" with a consultant to be a general advisor on technical issues to both the Company’s President and its subsidiary, Veritec Financial Systems, Inc. Per the payment terms of the Consulting Agreement, the consultant is to receive both monthly cash compensation and 5,000 shares of common stock. As of June 30, 2015, 50,000 shares of common stock with a value of $7,400 have not been issued and have been reflected as common shares to be issued in the accompanying consolidated balance sheet. During the six months ended December 31, 2015, the Company recorded an obligation to issue an additional 20,000 shares of common stock with an aggregate fair value of $2,100. The Consulting Agreement was terminated on October 31, 2015. As of December 31, 2015, the 70,000 shares of common stock with a value of $9,500 have not been issued and have been reflected as common shares to be issued in the accompanying consolidated balance sheet.

NOTE 9 – STOCK OPTIONS

Stock Options

A summary of stock options for the three months ended December 31, 2015 is as follows:

The Company has agreements with certain employees 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 grant, the options vest one year from the date of grant, and the options expire five years after vesting. The Company granted 2,500,000 options under this arrangement during fiscal year 2013. There were no options granted during the three months ended December 31, 2015 under this agreement. The Company recognized no stock-based compensation expense related to stock options during the three and six months ended December 31, 2015 and 2014, respectively. As of December 31, 2015, there was no remaining unrecognized compensation costs related to stock options. Based upon the trading value of the common shares, there was no intrinsic value of these options as of December 31, 2015.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model that uses the weighted-average assumptions noted in the following table. The risk-free rate for periods within the contractual life of the options is based on the U. S. Treasury yield in effect at the time of the grant. Volatility was based on the historical volatility of the Company’s common stock. The Company estimated the expected life of options based on historical experience and other averaging methods.

Additional information regarding options outstanding as of December 31, 2015 is as follows:

The weighted-average remaining contractual life of stock options outstanding and exercisable at December 31, 2015 is 4.20 years.

NOTE 10. RELATED PARTY TRANSACTIONS

The Company has relied on The Matthews Group, LLC, owned 50% by Ms. Van Tran, the Company’s CEO/Executive Chair and a director, and 50% by Larry Johanns, a significant stockholder of the Company, for funding (see Note 8).

During the year ended June 30, 2015, the Company received various unsecured, non-interest bearing, due on demand advances from its CEO Ms. Van Tran, a related party. During the six months December 31, 2015, the Company received additional advances of $10,000 from Ms. Tran. The balances due Ms. Tran as of December 31, 2015 and June 30, 2015 were $106,110 and $96,110, respectively. These advances have been classified as accounts payable, related party on the accompanying consolidated balance sheets.

Effective October 1, 2015, the Company entered into a management services agreement with the Matthews Group for which the Company will manage all facets of its previous barcode technology assets, on behalf of the Matthews Group, from October 1, 2015 to March 31, 2016. Per the terms of the management services agreement, the Company earned 20% of all revenues, or $21,968, from the barcode technology business during the three and six months ended December 31, 2015. Additionally all cash flow (revenues collected less management fee and reimbursement of direct expenses incurred) from October 1, 2015 to March 31, 2016 will be retained by the Company and classified as a unsecured related party note payable, due on demand, bearing interest at 10% per annum. During the three months ended December 31, 2015, the loan proceeds under this agreement totaled $146,475.

The Company also leases its office facilities from Ms. Tran. For the three and six months ended December 31, 2015 and 2014, rental payments to Ms. Van Tran totaled $12,750 and $25,500, and 12,750 and $25,500, respectively.

NOTE 11. SUBSEQUENT EVENTS

On January 17, 2016, Veritec Inc. (the “Company”) entered into an agreement with Vietnam Alliance Capital (“VAC”), which is domiciled in Vietnam, to form a joint venture (“JV’) to operate a debit card business in Vietnam. The JV will be named Veritec Asia. The Company will be a 30% member in the JV and VAC will be a 70% member in the JV. Pursuant to the agreement, the Company will grant a license of certain products to the JV, and provide certain technologies and technological support to the JV. VAC will manage, control, and conduct its day-to-day business and development activities. In addition VAC has agreed to raise all funds to capitalize the JV.

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

Results of Operations – Three Months Ended December 31, 2015 compared to December 31, 2014

We had a net loss of $282,844 and $41,821 for the three months ended December 31, 2015 and 2014, respectively.

Revenues

Details of revenues are as follows:

Mobile Banking Technology

Mobile Banking Technology revenues include products such as the Company’s Blinx On-Off™ prepaid toggle Card and its Open Loop/Close Loop System and Bio ID Card Platform. Mobile Banking Technology uses web-based mobile technology to offer financial cardholders the very best technology in conducting secure financial transactions in real time, protecting personal identity, and financial account security. Mobile Banking Technology revenues for the three months ended December 31, 2015 and 2014 were $71,458 and $203,658, respectively. The decrease in Mobile Banking Technology revenues of $132,200 was due to the difference in timing on projects delivered during the period as compared to the same period of the prior year.

Barcode Technology

Barcode Technology revenues are derived from our Product Identification systems sold principally to customers in the LCD manufacturing industry. Identification Card revenues in these periods were a result of sales of identification card and mobile banking systems.

The decrease in Barcode Technology revenues was mainly attributable to the decreased 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 relatively low demand for product identification product licenses in the LCD industry. A large portion of our license sales are concentrated in the Asia-Pacific market, which decreased in Taiwan, Japan, Germany, and increased in Korea and China.

On December 31, 2015, the Company and The Matthews Group, a related party, entered into an Asset Purchase Agreement pursuant to which the Company sold the intellectual property assets relating to its Barcode Technology. The sale allows the Company to focus its efforts solely on growing its Mobile Banking Technology business.

Other Revenue, related party

Effective October 1, 2015, the Company entered into a management services agreement with the Matthews Group for which the Company will manage all facets of its previous barcode technology business, on behalf of the Matthews Group, from October 1, 2015 to March 31, 2016. Per the terms of the management services agreement, the Company earned 20% of all revenues, or $21,968, from the barcode technology business during the three months ended December 31, 2015.

Cost of Sales

Cost of sales for the three months ended December 31, 2015 and 2014, totaled $110,952 and $99,480, respectively. The increase in expense was the result of increased labor costs associated with projects being implemented during the period as compared to the same period of the prior year. For the three months ended December 31, 2015 and 2014, cost of sales as a percentage of revenue were 118.8% and 25.0%, respectively.

Operating Expenses

General and administrative expense for the three months ended December 31, 2015 and 2014 was $150,387 and $252,326, respectively. The decrease of $101,939 in expenses was realized from expense reductions relating to the sale of its barcode technology business and reduced outside contractors and professional fees.

Sales and marketing expense for the three months ended December 31, 2015 and 2014 was $2,566 and $16,000, respectively. The decrease of $13,434 was the result of changes in the timing of expenses associated with sales and marketing efforts as compared to the same period of the prior year.

Research and development expense for the three months ended December 31, 2015 and 2014 was $23,232 and $25,876, respectively. The decrease of $2,644 in expense was realized from expense reductions relating to the sale of its barcode technology business and completion of certain research and development projects as compared to the same period of the prior year.

Other Expenses, net

Other expense for the three months ended December 31, 2015 and 2014, which includes primarily interest expense, was $89,183 and $45,967, respectively. The increase was primarily a result of $36,875 of non-cash expense relating to the beneficial conversion feature of convertible notes payables during the three months ended December 31, 2015. No similar expense occurred during the same period of the prior year.

Results of Operations – Six Months Ended December 31, 2015 compared to December 31, 2014

We had a net loss of $1,077,759 and $283,826 for the six months ended December 31, 2015 and 2014, respectively.

Revenues

Details of revenues are as follows:

Mobile Banking Technology

Mobile Banking Technology revenues include products such as the Company’s Blinx On-Off™ prepaid toggle Card and its Open Loop/Close Loop System and Bio ID Card Platform. Mobile Banking Technology uses web-based mobile technology to offer financial cardholders the very best technology in conducting secure financial transactions in real time, protecting personal identity, and financial account security. Mobile Banking Technology revenues for the six months ended December 31, 2015 and 2014 were $138,721 and $289,347, respectively. The decrease in Mobile Banking Technology revenues of $150,626 was due to the difference in timing on projects delivered during the period as compared to the same period of the prior year.

Barcode Technology

Barcode Technology revenues are derived from our Product Identification systems sold principally to customers in the LCD manufacturing industry. Identification Card revenues in these periods were a result of sales of identification card and mobile banking systems.

The decrease in Barcode Technology revenues was mainly attributable to the decreased 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 relatively low demand for product identification product licenses in the LCD industry. A large portion of our license sales are concentrated in the Asia-Pacific market, which decreased in Taiwan, Japan, Germany, and increased in Korea and China.

On December 31, 2015, the Company and The Matthews Group, a related party, entered into an Asset Purchase Agreement pursuant to which the Company sold the intellectual property assets relating to its Barcode Technology. The sale allows the Company to focus its efforts solely on growing its Mobile Banking Technology business.

Other Revenue, related party

Effective October 1, 2015, the Company entered into a management services agreement with the Matthews Group for which the Company will manage all facets of its previous barcode technology business, on behalf of the Matthews Group, from October 1, 2015 to March 31, 2016. Per the terms of the management services agreement, the Company earned 20% of all revenues, or $21,968, from the barcode technology business during the six months ended December 31, 2015.

Cost of Sales

Cost of sales for the six months ended December 31, 2015 and 2014, totaled $197,588 and $168,660, respectively. The increase in expense was the result of increased labor costs associated with projects implemented during the period as compared to the same period of the prior year. For the six months ended December 31, 2015 and 2014, cost of sales as a percentage of revenue were 67.1% and 30.5%, respectively.

Operating Expenses

General and administrative expense for the six months ended December 31, 2015 and 2014 was $364,933 and $374,959, respectively. The decrease in expense of $10,026 in expenses was realized from expense reductions relating to the sale of its barcode technology business and reduced outside contractors and professional fees.

Sales and marketing expense for the six months ended December 31, 2015 and 2014 was $16,641 and $45,196, respectively. The decrease of $28,555 was the result of changes in the timing of expenses associated with sales and marketing efforts as compared to the same period of the prior year.

Research and development expense for the six months ended December 31, 2015 and 2014 was $41,817 and $57,358, respectively. The decrease of $15,541 in expense was realized from expense reductions relating to the sale of its barcode technology business and completion of certain research and development projects as compared to the same period of the prior year.

Other Expenses, net

Other expense for the three months ended December 31, 2015 and 2014, which includes primarily interest expense, was $751,183 and $190,407, respectively. The increase in expense was primarily a result of $643,958 and $98,875 of non-cash expense relating to the beneficial conversion feature of convertible notes payables during the six months ended December 31, 2015 and 2014, respectively.

Liquidity

Our cash balance at December 31, 2015 decreased to $32,909 as compared to $52,762 at June 30, 2015. The decrease was the result of $319,142 in cash used in operating activities offset by $299,289 in cash provided by financing activities. Net cash used in operations during the six months ended December 31, 2015 was $319,142 compared with $57,513 of cash provided by operations during the same period of the prior year. Cash used in operations during the six months ended December 31, 2015 was primarily due to our net loss in the period of $1,077,759 offset by non-cash expenses of $767,951. Net cash provided by financing activities of $299,289 during the six months ended December 31, 2015 was primarily due to proceeds received from notes payable of $301,789 offset by payments of $2,500 on notes payable. During the same period of the prior year, net cash used in financing activities of $4,500 was from proceeds received from notes payable of $148,000 offset by payments of $143,500 on notes payable.

The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. During the six months ended December 31, 2015, the Company had a net loss of $1,077,759. At December 31, 2015, the Company had a working capital deficit of $3,100,319 and a stockholders’ deficiency of $3,092,700. The Company is delinquent or in default on $1,491,705 of its notes payable and is delinquent in payment of certain amounts due of $361,017 for payroll taxes and accrued interest and penalties as of December 31, 2015.

These factors, among others, raise substantial doubt about our ability to continue as a going concern. As a result, our independent registered public accounting firm, in its report on our June 30, 2015 financial statements, has raised substantial doubt about our ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might be necessary should we be unable to continue as a going concern.

The Company believes its cash and forecasted cash flow from operations will not be sufficient to continue operations through fiscal 2016 without continued external investment. The Company believes it will require additional funds to continue its operations through fiscal 2016 and to continue to develop its existing projects and plans to raise such funds by finding additional investors to purchase the Company’s securities, generating sufficient sales revenue, implementing dramatic cost reductions or any combination thereof. There is no assurance that the Company can be successful in raising such funds, generating the necessary sales or reducing major costs. Further, if the Company is successful in raising such funds from sales of equity securities, the terms of these sales may cause significant dilution to existing holders of common stock.

The Company has traditionally been dependent on The Matthews Group, LLC, a related party, for its financial support. The Matthews Group is owned 50% by Van Tran, the Company’s CEO/Executive Chair and a director, and 50% by Lawrence J. Johanns, a significant Company stockholder.

Recent Accounting Pronouncements

See Footnote 4 of our condensed consolidated financial statements for a discussion of recently issued accounting standards.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Critical Accounting Policies

Stock-Based Compensation:

The Company periodically issues stock options and warrants to employees and non-employees in capital raising transactions, for services and for financing costs.  Stock-based compensation for employees is measured at the grant date, based on the fair value of the award, and is recognized as expense over the requisite service period.  Options vest and expire according to terms established at the grant date. The value of the stock compensation to non-employees is based upon the measurement date as determined at either (a) the date at which a performance commitment is reached or (b) at the date at which the necessary performance to earn the equity instruments is complete.

We estimate volatility and forfeitures based upon historical data. As permitted by the authoritative guidance issued by the FASB, we use the “simplified” method to determine the expected life of an option due to the Company’s lack of sufficient historical exercise data to provide a reasonable basis, which is a result of the relative high turnover rates experienced in the past for positions granted options. All of these variables have an effect on the estimated fair value of our share-based awards.

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, identification card revenue, and debit card 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.

The Company, as a processor and a distributor, recognizes revenue from transaction fees charged cardholders for the use of its issued mobile debit cards. The fees are recognized on a monthly basis after all cardholder transactions have been summarized and reconciled with third party processors.

ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

A smaller reporting company is not required to provide the information required by this Item 3.

ITEM 4 CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures.

Our management, with the participation of our chief executive officer and our chief financial officer, carried out an evaluation of the effectiveness of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 (the “Exchange Act”) Rules 13a-15(e) and 15-d-15(e)) as of the end of the period covered by this report (the “Evaluation Date”).  Based upon that evaluation, our chief executive officer and our chief financial officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were not effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate to allow timely decisions regarding required disclosure.  As of December 31, 2015, our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses in our internal control over financial reporting described in our Form 10-K at June 30, 2015.

Changes in Internal Control over Financial Reporting.

In our Form 10-K at June 30, 2015, we identified certain matters that constitute material weaknesses (as defined under the Public Company Accounting Oversight Board Auditing Standard No. 2) in our internal control over financial reporting as discussed on Management’s Report on Internal Control Over Financial Reporting.  We are undergoing ongoing evaluation and improvements in our internal control over financial reporting.  Regarding our identified weaknesses, we have performed the following remediation efforts:

There was no other change in our internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

ITEM 1 LEGAL PROCEEDINGS

The Company is subject to various legal proceedings from time to time in the ordinary course of business, none of which is required to be disclosed under this Item 1.

ITEM 1A RISK FACTORS

A smaller reporting company is not required to provide the information required by this Item.

ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3 DEFAULTS UPON SENIOR SECURITIES

The Company is in default on its various notes payable totaling $1,491,705 representing principal and accrued interest as of December 31, 2015.

TEM 4 MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5 OTHER INFORMATION

The Company is delinquent in payment of $361,017 for payroll taxes and accrued interest and penalties as of December 31, 2015.

On January 20, 2016, Joseph Valandra resigned as a member of the Company’s Board of Directors.

ITEM 6 EXHIBITS

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.