UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934 (No fee required)
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 15 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date. As of May 14, 2007, the Company had:
Transition Small Business Disclosure Format (check one): Yes [ ] No [X]
FORM 10-QSB
VERITEC, INC.
INDEX
Page(s)
PART I. FINANCIAL INFORMATION 1
Item 1. Financial Statements 1
Item 2. Management's Discussion and Analysis or Plan of Operation 9
Item 3. Controls and Procedures 14
PART II. OTHER INFORMATION 14
Item 1. Legal Proceedings 14
Item 1A. Risk Factors 16
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 18
Item 6. Exhibits 18
Signatures 18
Exhibits Index 19
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
VERITEC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, June 30,
2007 2006
-------------- ---------------
ASSETS (Unaudited) (Audited)
Current Assets:
Cash $ 1,353,321 $ 898,424
Accounts receivable, net 61,071 59,173
Note receivable 76,223 --
Inventories 15,156 7,495
Prepaid expenses 50,650 4,650
------------ -------------
Total Current Assets 1,556,421 969,742
Property and Equipment, net 91,538 21,088
Software License 95,000 --
------------ -------------
Total Assets $ 1,742,959 $ 990,830
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 86,863 $ 37,400
Accrued expenses 424,550 285,372
------------ -------------
Total Current Liabilities 511,413 322,772
Prepayment on Stock and Subscription Receivable -- 92,008
------------ -------------
Total Liabilities 511,413 414,780
------------ -------------
Commitments and Contingencies
Stockholders' Equity:
Convertible preferred stock, par value $1.00; authorized 10,000,000 shares, 276,000
shares of Series H authorized, 1,000 shares issued 1,000 1,000
Common stock, par value $.01; authorized 20,000,000 shares, 15,078,598 shares issued 150,786 150,786
Subscription receivable (243,751) (386,138)
Additional paid-in capital 13,534,261 13,420,192
Accumulated deficit (12,210,750) (12,609,790)
------------ -------------
Total Stockholders' Equity 1,231,546 576,050
------------ -------------
Total Liabilities and Stockholders' Equity $ 1,742,959 $ 990,830
============ =============
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See notes to condensed consolidated financial statements.
VERITEC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months ended March 31,
----------------------------------
2007 2006
-------------- ---------------
Revenues:
License and other $ 171,015 $ 683,379
Infringement 1,105,966 --
------------ -------------
Total Revenues 1,276,981 683,379
Cost of Sales 24,191 9,571
------------ -------------
Gross Profit 1,252,790 673,808
------------ -------------
Operating Expenses:
Selling, general and administrative 709,070 92,124
Research and development 95,716 2,537
------------ -------------
Total Operating Expenses 804,786 94,661
------------ -------------
Income from Operations 448,004 579,147
------------ -------------
Other Income:
Settlement with creditors -- 9,356,948
Interest Income 15,193 782
------------ -------------
Total Other Income 15,193 9,357,730
------------ -------------
Net Income $ 463,197 $ 9,936,877
============ =============
Income Per Common Share - Basic and Diluted $ 0.03 $ 0.66
============ =============
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See notes to condensed consolidated financial statements.
VERITEC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Nine months ended March 31,
----------------------------------
2007 2006
-------------- ---------------
Revenues:
License and other $ 362,913 $ 1,302,077
Infringement 1,767,894 179,053
------------ -------------
Total Revenues 2,130,807 1,481,130
Cost of Sales 39,729 43,214
------------ -------------
Gross Profit 2,091,078 1,437,916
------------ -------------
Operating Expenses:
Selling, general and administrative 1,433,128 673,707
Research and development 290,611 60,737
------------ -------------
Total Operating Expenses 1,723,739 734,444
------------ -------------
Income from Operations 367,339 703,472
------------ -------------
Other Income:
Settlement with creditors -- 9,356,948
Interest Income 31,701 6,351
------------ -------------
Total Income 31,701 9,363,299
------------ -------------
Net Income $ 399,040 $ 10,066,771
============ =============
Income Per Common Share - Basic and Diluted $ 0.03 $ 0.67
============ =============
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See notes to condensed consolidated financial statements.
VERITEC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended March 31,
----------------------------------
2007 2006
-------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 399,040 $ 10,066,771
Adjustments to reconcile net income to net cash provided by operating activities:
Settlement with creditors -- (9,356,948)
Depreciation 7,728 5,090
Amortization of software license 5,000 --
Stock based compensation 123,539 --
Interest added to note receivable (6,794) --
Services applied to reduce note receivable 26,488 --
Changes in operating assets and liabilities:
Accounts receivable (1,898) (126,645)
Inventories (7,661) 3,077
Prepaid expenses (46,000) 5,558
Accounts payables and accrued expenses 119,698 (105,997)
------------ -------------
Net cash provided by operating activities 619,140 490,906
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Advance on note receivable (400,000) --
Collection on note receivable 304,083 --
Purchases of equipment (23,882) --
Purchases of software license (100,000) --
------------ -------------
Net cash used by investing activities (219,799) --
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITY
Proceeds from subscription receivable 55,556 --
------------ -------------
NET INCREASE IN CASH 454,897 490,906
CASH AT BEGINNING OF PERIOD 898,424 432,518
------------ -------------
CASH AT END OF PERIOD $ 1,353,321 $ 923,424
============ =============
NONCASH ACTIVITIES
Applied accrued expenses and prepayment on subscription receivable to subscription
receivable $ 111,111 $ 166,667
Purchase of property and equipment of Secure Environments, Inc. in year end accrued
expenses 6,296 --
Purchase of property and equipment included in accounts payable 48,000 --
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See notes to condensed consolidated financial statements.
VERITEC, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A. THE COMPANY
The Company refers to Veritec, Inc. (Veritec) and its wholly owned subsidiary VCode Holdings, Inc. (VCode).
B. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States of America generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B. Accordingly, the condensed consolidated financial statements do not include all of the information and footnotes required by GAAP 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, 2007, are not necessarily indicative of the results that may be expected for the year ended June 30, 2007. For further information, refer to the Consolidated Financial Statements and footnotes thereto included in our Form 10-KSB as of and for the year ended June 30, 2006. The Condensed Consolidated Balance Sheet at June 30, 2006, has been derived from the audited consolidated financial statements at that date, but does not include all of the information and footnotes required by GAAP.
The accompanying condensed consolidated financial statements include the accounts of Veritec and VCode. All inter-company transactions and balances were eliminated in consolidation.
C. NATURE OF BUSINESS
The Company is primarily engaged in the development, marketing and sales of a line of microprocessor based encoding and decoding systems that utilize Matrix Symbology, a two-dimensional barcode technology originally invented by the founders of Veritec under United States Patent Nos. 4,924,078, 5,331,176 and 5,612,524. As more fully described below, these patents are the property of VCode. The Company's encoding and decoding systems allow a manufacturer, distributor, reseller or user of products to create and apply unique identifiers to the products in the form of a coded symbol. The coded symbol, containing the binary encoded data applied to the product, enables automated manufacturing control, together with identification, tracking, and collection of data through cameras, readers and scanners also marketed by the Company. The collected data is then available for contemporaneous verification or other user definable purposes. The Company has also developed a Secured Identification System based upon its proprietary VSCode(TM) and VeriCode(R) Symbology. The Company's Secured Identification System enables the storage of images, biometric information and data for contemporaneous verification of an individual's unique identity. VCode holds patents in Europe (German patent No. 69033621.7; French patent No. 0438841; and Great Britain patent No. 0438841) and has applications pending with the United States Patent and Trademark Office for novel uses of its Multi-Dimensional Matrix Symbology. In addition to the United States patents owned by VCode, Veritec holds United States Patent No. 7,159,780.
The Company's core business is the sale of its Multi-Dimensional Matrix Symbology together with its proprietary software products for the writing and reading thereof. Veritec owns a wholly owned subsidiary, VCode, a Minnesota corporation with offices also located at 2445 Winnetka Avenue North, Golden Valley, Minnesota 55427.
In November 2003, Veritec formed VCode to which it assigned United States Patent Nos. 4,924,078, 5,331,176 and 5,612,524, together with all corresponding patent applications, foreign patents, foreign patent applications, and all continuations, continuations in part, divisions, extensions, renewals, reissues and re-examinations. VCode in turn entered into an Exclusive License Agreement with VData LLC (VData), an Illinois limited liability company unrelated to Veritec. The purpose of the Exclusive License Agreement is to allow VData to pursue enforcement and licensing of the patents against parties who wrongfully exploit the technology of such patents. VData is the wholly owned subsidiary of Acacia Research Corporation (NASDAQ: ACTG) (collectively Acacia). The Exclusive License Agreement provides that all expenses related to the enforcement and licensing of the patents will be the responsibility of VData, with the parties sharing in the net proceeds as specified under the terms of the agreement, arising from enforcement or licensing of the patents.
D. SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Infringement revenue is recognized upon completion of all required terms under the agreement with VData and collection is reasonably assured. As a result, all infringement revenue has been recorded in the quarter it was received. Revenues from software sales, product sales and engineering are recognized when products are shipped or services performed. License fees are recognized upon completion of all required terms under the agreement. The process typically begins with a customer purchase order detailing its hardware specifications so the Company can customize its software to the customer's hardware. Once customization is completed, the Company typically transmits the software to the customer via the Internet. Revenue is recognized at that point. Once the software is transmitted, the customers do not have a right of refusal or return. Under some agreements the customers remit payment prior to the Company having completed customization or completion of any other required services. In these instances, the Company delays revenue recognition and reflects the prepayments as customer deposits.
Software License
The software license from RBA International, Inc. is capitalized at cost and amortized using the straight-line method over a life of five years starting January 2007.
E. INCOME PER COMMON SHARE
Basic income per common share is computed by dividing income available to common stockholders (net income) by the weighted-average number of common shares outstanding for the period. Diluted income per common share, in addition to the weighted average determined for basic income 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. Potentially dilutive instruments include stock options, warrants and preferred stock.
The weighted average shares outstanding were 15,078,598 for all periods presented.
Diluted income per common share for the three and nine months ended March 31, 2007 and 2006, was computed as follows:
March 31, 2007 March 31, 2006
------------------------------ ------------------------------
Three Nine Three Nine
Months Months Months Months
------------- ------------- ------------ -------------
Net income $463,197 $399,040 $9,936,877 $10,066,771
============= ============= ============ =============
Weighted average shares outstanding 15,078,598 15,078,598 15,078,598 15,078,598
Incremental shares from assumed
exercise or conversion of dilutive
instruments:
Options and warrants 32,130 35,084 15,000 15,000
Preferred stock 10,000 10,000 10,000 10,000
------------- ------------- ------------ -------------
Shares outstanding -- diluted 15,120,728 15,123,682 15,103,598 15,103,598
============= ============= ============ =============
Income per common share - diluted $0.03 $0.03 $0.66 $0.67
============= ============= ============ =============
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F. STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation under Financial Accounting Standards (SFAS) No. 123(R), "Share-Based Payment". SFAS No. 123(R) requires the cost of employee compensation paid with equity instruments to be measured based on grant-date fair values and recognized over the vesting period.
The board of directors authorized the Chief Executive Officer (CEO) to issue up to 1,000,000 shares of the Company's common stock in the form of options or stock bonuses to employees and consultants. At March 31, 2007, stock and stock options totaling 554,166 have been committed under this authorization.
The Company has agreements with certain employees and consultants that provide for five years of annual grants of options to purchase shares of the Company's common stock. The option price is 15% below 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. For the three months ended March 31, 2007, the Company issued 40,000 options under these agreements. At March 31, 2007, the Company has commitments under these agreements to issue additional grants of options of 30,000 for fiscal year 2007, 90,000 for each fiscal year 2008 through 2010, and 60,000 options in fiscal 2011.
The weighted-average fair value of options granted for the three months ended March 31, 2007, was $0.46 per option and was estimated using the Black-Scholes option pricing model with the following weighted-average assumptions: risk free interest rate -- 4.70%, dividend yield -- 0%, volatility -- 4.15%, and expected life -- 3 years. Volatility was extracted from the small market capitalization of the Dow Jones Indexes under the computer service subsector. Stock-based compensation expense of $13,907 and $0 was recognized in the three months ended March 31, 2007 and 2006, respectively. Stock-based compensation expense of $89,789 and $0 was recognized in the nine months ended March 31, 2007 and 2006, respectively. As of March 31, 2007, there was $19,335 of unrecognized compensation costs related to stock options. These costs are expected to be recognized over the next three quarters.
A summary of stock options is as follows:
Number of Option Price Per
Options Share
---------------- ------------------
Balance at June 30, 2006 30,000 $2.04
Granted 40,000 $0.25
Granted 46,666 $0.94 - $1.36
Granted 40,000 $1.45
Expired (5,000) $1.36
------------
Balance at March 31, 2007 151,666* $0.25 - $2.04
============
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*40,000 shares fully vested, 111,666 shares vest in fiscal 2007; 5.2 years remaining contractual life.
The Company has an agreement with an employee to issue 5,000 shares of the Company's common stock beginning August 2006 and 2,000 shares annually thereafter for five years. Compensation expense related to this agreement was $7,500 for the nine months ended March 31, 2007. The issuance of the 5,000 shares of common stock is expected in the Company's fourth quarter.
The Company entered into an agreement with a consultant to issue 15,000 shares of the Company's common stock as of January 2, 2007. Compensation expense related to this agreement was $26,250 for the three and nine months ended March 31, 2007. The issuance of the stock is expected in the Company's third quarter of fiscal 2008.
G. NOTE RECEIVABLE
In December 2006, the Company loaned $100,000 to RBA International, Inc. (RBA) in exchange for a promissory note from RBA International, Inc. The unsecured note bears annual interest at 10%, was due January 31, 2007 and can be prepaid at any time without penalty. In January 2007, the Company agreed to extend the note to March 1, 2007, and apply all charges incurred by the Company for services performed and/or software purchases against the note and accrued interest until such time that the note is paid in full. As of March 31, 2007, there have been services performed by RBA totaling $26,488 that
offset principal and interest of the note receivable due Veritec. As of March 31, 2007, the note receivable has a current outstanding balance of $76,223, which is comprised of the principal amount of $100,000, accrued interest of $2,711 and reductions of $26,488 for services performed by RBA. Demand for payment of the promissory note has not been pursued since it is expected that by June 30, 2007, sufficient services will be performed by RBA negating any monies due Veritec from this note receivable.
In January 2007, the Company loaned $300,000 to RBA in exchange for a promissory note from RBA and related owners of RBA. The note bears annual interest at 10% and was due on or before March 1, 2007 and is collateralized by certain assets of RBA. The Company has been granted an exclusive right to purchase a majority ownership in RBA on or before January 5, 2008. Unpaid principal and interest on the note can be prepaid without penalty and may be applied as a payment towards a majority ownership interest in RBA by the Company. On March 1, 2007, the Company received a payment totaling $304,083, which paid in full the note and accrued interest. The Company retains the exclusive right to purchase a majority ownership in RBA.
In the first part of April 2007, the Company loaned $100,000 to RBA in exchange for a promissory note. The note bore annual interest at 8% and was due on or before May 16, 2007 and was collateralized by certain assets of RBA. Principal and interest on the note could have been prepaid at any time without penalty. Towards the end of April 2007 the Company loaned an additional $100,000 to RBA and in exchange merged both borrowings into a new promissory note. The new promissory note was for the amount of $200,900. The promissory note balance was composed of the two loans to RBA during the month of April in the amount of $100,000 each and $900 for the interest, which the first promissory note would have yielded had it gone to maturity. The new note bears no annual interest but instead provides the Company with two software licenses; is due on or before May 16, 2007 and is collateralized by certain assets of RBA. The note can be prepaid at any time prior to May 16, 2007, however the two software licenses remain the property of the Company.
H. NOTE PAYABLE -- RELATED PARTY
In November 2003, a consultant and shareholder of the Company loaned $50,000 to the Company for working capital. The Company agreed to issue 2,500 shares of common stock. This note payable was paid in August 2004. The issuance of the 2,500 shares of common stock is expected in the Company's fourth quarter of 2007.
I. SUBSCRIPTION RECEIVABLE
In September 1999, as required under its 1997 bankruptcy plan of reorganization, The Matthews Group (a stockholder and related party) received 275,000 shares of Series H convertible preferred stock in exchange for a promissory note in the amount of $2,000,000 (subscription receivable). The promissory note is collateralized by deeds of trust to real property located in California and Minnesota owned by Van Tran and Larry Johanns, the sole principals of The Matthews Group. The real property collateralizing the promissory note has a fair value in excess of all encumbrances including the remaining principal balance of the promissory note to which Veritec is the beneficiary. The promissory note originally required 108 monthly non-interest bearing payments of $18,519. Imputed interest on the subscription receivable is excluded from operating results and is instead credited directly to additional paid-in capital. As the principal amount of the promissory note is reduced, The Matthews Group has the right to require the Company to release encumbrances against the real property collateralizing the subscription obligation.
From time to time, The Matthews Group has made prepayments against its subscription obligation. Prepayments are nonrefundable and non-interest bearing.
J. OTHER SIGNIFICANT EVENTS
In January 2007, the Company, signed a work order with RBA in the amount of $48,000 for the analysis and design of a commercial website that allows an individual to place an order for either tickets, gift cards or both, the ability to make and accept payments via debit or credit cards and to integrate with our PhoneCodes(C), software and ultimately send notification along with the VeriCode(R), to a recipient's cell phone.
In January 2007, the Company signed a Value Added Reseller (VAR) agreement with DataCard Group, Minnetonka, Minnesota. The agreement gives the Company the right to sell DataCard products in conjunction with our own products. DataCard Group manufactures and distributes card printers, card printer accessories and card printer supplies.
In November 2006, the Company entered into an agreement to design and develop a line of readers to overcome the Company's dependence on outside suppliers. In Phase One of the project, a proto-type cell phone reader designed by the
manufacturing company was evaluated and accepted. Phase Two of the project requires the manufacturing company to design and manufacture four individual proto-type models of readers that work with Matrix Symbologies. The agreement required a deposit of $30,000 and payments of $30,000 for each of the four defined milestones with the total project cost not to exceed $150,000. The project is continuing to progress but at this time no estimate as to the completion date has been determined. To date the Company has made the required deposit of $30,000 and a $20,000 advance. Payment under this agreement is recorded as research and development expense as the service is provided. Under this agreement, we have committed to purchase 5,000 readers totaling $660,000, over the course of a two year period of time, which would begin once development and testing of the product has been completed and accepted. However, the company contracted to do the design and manufacture of the readers has not met the agreed upon timetable for completion of the project and therefore are no longer in compliance with this agreement. As a result, Veritec has begun discussions pertaining to the re-negotiation of this agreement.
On February 6, 2007, the Company authorized a $300,000 bonus to the Company's CEO. The bonus is payable in either cash or stock equivalents to be determined at the sole discretion of the CEO. If the CEO elects to receive such bonus in the form of restricted stock, the stock price to be used to calculate the number of shares of restricted stock will be the closing market price on February 6, 2007 of $1.15 per share. The timing of the bonus payment, either as partial payment or payment in full and the form of the bonus is at the sole discretion of the CEO. At this time, no stock or cash has been issued. The liability for the bonus is recorded based on the greater of $300,000 or the value of the shares the CEO is entitled to receive based on the closing balance sheet date stock price. At March 31, 2007, the Company accrued $300,000 for the bonus.
K. RECENTLY ISSUED ACCOUNTING STANDARD
In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements. This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Additionally, this interpretation provides guidance on the de-recognition and classification of a tax position reflected within the financial statements and the recognition of interest and penalties in interim and annual periods. FIN 48 is effective for the Company on July 1, 2007. The Company is currently evaluating the effect of this standard on our consolidated financial statements.
Item 2. Management's Discussion and Analysis or Plan of Operation
This Form 10-QSB contains various "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements represent the Company's expectations and beliefs concerning the Company's outlook, future economic events, future performance and attainment of future goals based on information available to the Company on the date of the filing of this Form 10-QSB, and are subject to various risks and uncertainties.
The Private Securities Litigation Reform Act of 1995 provides "safe harbor" for forward-looking statements. These statements contain forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. These statements are based upon our current expectations and speak only as of the date hereof. Our actual results may differ materially and adversely from those expressed in any forward-looking statements as a result of various factors and uncertainties affecting technology companies, our ability to successfully develop products, rapid technological change in our markets, changes in demand for our future products, legislative, regulatory and competitive developments and general economic conditions. Our SEC filings discuss some of the important risk factors that may affect our business, results of operations and financial condition. We undertake no obligation to revise or update publicly any forward-looking statements for any reason except as required by law.
Critical Accounting Policies
Revenue Recognition
Infringement revenue is recognized upon completion of all required terms under the agreement with VData and collection is reasonably assured. As a result, all infringement revenue has been recorded in the quarter it was received. Revenues from software sales, product sales and engineering are recognized when products are shipped or services performed. License fees are recognized upon completion of all required terms under the agreement. The process typically begins with a customer purchase order detailing its hardware specifications so the Company can customize its software to the customer's hardware. Once customization is completed, the Company typically transmits the software to the customer via the Internet. Revenue is recognized at that point. Once the software is transmitted, the customers do not have a right of refusal or return. Under some
agreements the customers remit payment prior to the Company having completed customization or completion of any other required services. In these instances, the Company delays revenue recognition and reflects the prepayments as customer deposits.
Software License
The software license from RBA International, Inc. is capitalized at cost and amortized using the straight-line method over a life of five years.
General
In February 2005, an adverse arbitration ruling was made against Veritec and in favor of Mitsubishi in the amount of $8,174,518 and enjoining Veritec and by extension Veritec's customers from the future use or sale of what was found to be "Mitsubishi's Error Detection and Correction Technology." This ruling and effort by Mitsubishi to reduce the ruling to judgment compelled Veritec to file a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Minnesota on February 28, 2005.
In February 2006, Veritec and Mitsubishi entered into a Settlement Agreement whereby, in exchange for $300,000, a license to utilize Veritec's VeriCode(R) technology, and dismissal of the patent infringement litigation filed by VData and VCode against Mitsubishi, Mitsubishi waived its right to the $8,174,518 and licensed Veritec's use of the Mitsubishi Error Detection and Correction Technology.
In April 2006, Veritec's Third Amended Plan of Reorganization was confirmed by the Bankruptcy Court. On August 8, 2006, after resolution of all disputed creditor claims, Veritec received from the Bankruptcy Court an Order and Final Decree closing the Chapter 11 case in its entirety. As a result of the closing of the Chapter 11 bankruptcy on August 8, 2006, Veritec was relieved of $9,356,948 in debt.
For a more detailed discussion on the bankruptcy proceedings and Veritec's Third Amended Plan of Reorganization, refer to the Form 8-K's identified as Exhibits hereto and filed with the Commission on February 17, 2005, February 28, 2005, December 19, 2005, March 10, 2006, May 1, 2006, and August 11, 2006, which are incorporated by reference.
Nature of Business
The Company is primarily engaged in the development, marketing and sales of a line of microprocessor based encoding and decoding systems that utilize Matrix Symbology, a two-dimensional barcode technology originally invented by the founders of Veritec under United States Patent Nos. 4,924,078, 5,331,176 and 5,612,524. The Company's encoding and decoding systems allow a manufacturer, distributor, reseller or user of products to create and apply unique identifiers to the products in the form of a coded symbol. The coded symbol containing the binary encoded data applied to the product enables automated manufacturing control, together with identification, tracking, and collection of data through cameras, readers and scanners also marketed by the Company. The collected data is then available for contemporaneous verification or other user definable purposes.
The Company has developed unique software, which will allow individuals or companies to receive or distribute gift cards, tickets or coupons using the VeriCode(R) technology via wireless phone or PDA.
The Company also receives fees from the enforcement and licensing of its patents under its Exclusive License Agreement with Acacia. The purpose of the Exclusive License Agreement is to allow VData to pursue enforcement and licensing of the patents against parties who wrongfully exploit the technology of such patents.
The Company also is developing its presence in the secure identification and access control markets by teaching the means to utilize the VSCode(TM) Identification (ID) Cards to store images, biometric data (retinal and fingerprint minutia) and alphanumeric data for contemporaneous verification of an individual's unique identity.
Infringement Revenue
For the three months ended March 31, 2007 and 2006, the Company recognized infringement revenue of $1,105,966 and $0, respectively, through its relationship with Acacia. For the nine months ended March 31, 2007, the Company recognized infringement revenue of $1,767,894 compared to infringement revenue of $179,053 for the nine months ended March 31, 2006. The Company recognizes infringement revenue upon the completion of all required terms under the agreement with
Acacia and when collection is assured. The patents, which are the subject of the infringement claims, are currently being reexamined by the U.S. Patent and Trademark Office and are the subject of a declaratory judgment action seeking to declare the patents invalid. All infringement actions have been suspended pending the outcome of these proceedings. Furthermore the patents expire in November 2007. Therefore it is likely that revenues from patent infringement claims will be significantly reduced.
Identification Card/SEI Acquisition
In October 2006, Veritec entered into an agreement to purchase selected assets of Secure Environments, Inc. (SEI), a Minnesota corporation that produces identification cards. The assets acquired consisted of office furniture, computer equipment, specialty software, and security card and badge printers. Veritec also acquired a customer base of 73 small to large commercial and municipal customers, including security firms and police departments. Terms of the purchase were Veritec's assumption of $3,940 in debt and a 10% royalty, not to exceed $150,000 in aggregate, for any future sales by Veritec to the 73 SEI customers. For the period ended December 31, 2006, the Company valued SEI assets at $6,296 and recorded the cost as an asset and an offsetting liability. Any royalty payments made as a result of the purchase of SEI will first be applied against the liability of $2,356 until such time as the liability has been satisfied. Once the liability has been satisfied, any future royalty payments will be expensed as incurred.
Results of Operations -- March 31, 2007 compared to March 31, 2006
Revenues
Revenues for the three months ended March 31, 2007 were $1,276,981 compared to $683,379 for the same period last year, an increase of $593,602. For the three months ended March 31, 2007, software license revenues were down by $506,497, hardware revenues were lower by $13,332, secure ID card revenue increased by $7,465 and infringement settlements were higher by $1,105,966.
The Company is continuing to see declining software license and hardware sales from our distributors located in the Far East. The primary reason for the decline is that other companies competing with our distributors have been able to improve their hardware to be equivalent or superior to the hardware of our distributors thus taking away an advantage our distributors once enjoyed. Accordingly, we are addressing these issues by continuing to grow the number of distributorships for our products and developing our own line of readers to make us more competitive in the market. In March 2007, Siemens A&D, SC, based in Nuremberg-Moorenbrunn, Germany, became a distributor for Veritec and immediately placed their first order of licenses. A second reason for the decline in revenue is the volatility of revenues due to the fluctuation of sales to Veritec's distributors who primarily service the LCD market. Revenues from this market are unpredictable as they are generated when customers open new production facilities or update production equipment. Although the Company has successfully emerged from bankruptcy, we believe our absence from the market, even for that brief time, was a deterrent in maintaining our market presence. The decline in software license and hardware revenue was offset by infringement revenue from Acacia of $1,105,966 for the three months ended March 31, 2007, compared to $0 for the same period in 2006. The decline in software license and hardware revenue was also offset by increased sales of secure ID card revenue totaling $7,473 for the three months ended March 31, 2007 compared to $7 for the three month period ended March 31, 2006. The increase in secure ID card revenue was the direct result of the acquisition of SEI, Inc.
Revenues of $2,130,807 for the nine months ended March 31, 2007, increased by $649,676 over the same nine months ended March 31, 2006. For the nine months ended March 31, 2007 compared to nine months ended March 31, 2006, software license and hardware revenue were down $932,107 and $22,358, respectively, offset by increases in infringement and secure ID card revenue of $1,588,841 and $15,300, respectively. The decline in software license and hardware revenues and the increase in secure ID card revenue for the nine months ended March 31, 2007, compared to the same period in 2006 are for the same reasons as explained for the three month period above. Infringement revenue from Acacia was $1,767,894 for the nine months ended March 31, 2007 and $179,053 for the nine months ended March 31, 2006 an increase of $1,588,841, which reflects Acacia's strong efforts to settle with infringers. For the nine month period ended March 31, 2007, infringement revenue received from Acacia was 83% of the total revenue compared to 12% for the same period in 2006.
Cost of Sales
Cost of sales of $24,191 for the three months ended March 31, 2007, increased by $14,620 or 153% from the same period in 2006, however as a percentage of revenue, cost of sales only increased 0.5% for the three months ended March 31, 2007 compared to the same period in 2006 as a result of the increase in infringement revenue during the periods which has no related cost. The $14,620 increase in cost of sales was predominantly from monthly charges of $19,250 for a designated site
and maintenance services of a computer database to store information in conjunction with our Independent Sales Organization (ISO) license, purchased from RBA in December 2006. These charges will continue to result in higher cost of sales and lower margins until such time as the revenue generated from this expense becomes significant. Cost of sales as a percentage of revenue has also been increasing as a result of the Company lowering the sale price of our software license to stay competitive with the market.
Cost of sales for the nine months ended March 31, 2007, totaled $39,729 and for the nine months ended March 31, 2006, cost of sales were $43,214 a decrease of $3,485. As a percentage of revenue, for the nine month period ended March 31, 2007, cost of sales was 1.9% compared to 2.9% for the nine months ended March 31, 2006 as a result of the increase in infringement revenue during the periods which has no related cost. Software license and hardware cost of sales as a percentage of revenue for the nine months ended March 31, 2007 was 10.9% and for the nine months ended March 31, 2006 the cost of sales as a percentage of revenue was 2.9% an increase of 8.0%. The decrease in cost of sales was predominantly from a lower volume of products being sold offset by monthly charges of $19,250 for a designated site and maintenance services of a computer database to store information in conjunction with our Independent Sales Organization (ISO) license, purchased from RBA in December 2006. Cost of sales as a percentage of revenue has also been increasing as a result of the Company lowering the sale price of our software license to stay competitive with the market.
Selling General and Administrative
Selling, general and administrative expenses were $709,070 for the three months ended March 31, 2007, and $92,124 for the three months ended March 31, 2006, an increase of $616,946. For the three months ended March 31, 2006, the Company was in Chapter 7 bankruptcy most of the period and thus incurred minimal expenses. The increase was in part the result of marketing expense totaling $95,823 for the three months ended March 31, 2007 compared to $0 for the period ended March 31, 2006. Since emerging from bankruptcy the Company has added a V.P. of Sales and Marketing/Public Relations, salespeople, outside consultants and other sales and marketing staff plus increased travel and advertising costs. For the three months ended March 31, 2007, payroll costs for sales and marketing totaled $59,031, consultant costs were $26,500 and the remaining sales and marketing expenses totaled $10,292. Administrative expenses for the three month period ended March 31, 2007, totaled $612,247 and $92,124 for the three months ended March 31, 2006. Payroll and related costs increased $424,392, which is the result of having a full quarter of administrative staff for the three months ended March 31, 2007 versus having a partial quarter of staff for the three month period ended March 31, 2006. The majority of the increase in payroll costs was due to the issuance of a $300,000 bonus to the CEO which was approved by the Company's Board of Directors for the period ended March 31, 2007. For the three months ended March 31, 2007, legal and audit fees were $74,535 and $0 for the same period in 2006, again the result of the Company being in Chapter 7 bankruptcy for most of that period. Facility costs of $24,783 for the three months ended March 31, 2007 were $17,631 higher than the same period in 2006.
For the nine months ended March 31, 2007, selling, general and administrative expenses were $1,433,128 and $673,707 for the nine months ended March 31, 2006 an increase of $759,421. For the nine months ended March 31, 2007, selling and marketing expense increased $171,195, as a result of staffing the sales and marketing department and spending the money to promote our product and attract clientele. Administrative expenses for the nine month period ended March 31, 2007, totaled $1,244,797 and $656,571 for the nine months ended March 31, 2006. Payroll and related costs increased $435,553, which is primarily the same reason as explained for the three month period, which includes issuance of a $300,000 bonus. For the nine months ended March 31, 2007, the remaining difference of $152,673 is proportionately the same as for the three month period where legal and audit and facility costs are the primary components of the $152,673 with all other administrative costs for the nine months ended March 31, 2007 and 2006, in total offsetting each other.
Research and Development
Research and development expense of $95,716 for the three months ended March 31, 2007 increased by $93,179 from 2006. Research and development expense was $290,611 for the nine month period ended March 31, 2007 and $60,737 for the nine months ended March 31, 2006. The increases for both the three and nine month periods were the result of the resumption of research and development efforts since emerging from bankruptcy, primarily through the use of consultants, which totaled $198,510 for the nine months ended March 31, 2007. Since the bankruptcy, we have concentrated our engineering efforts to finalize the development and production of the FCR-100 (Finger Print Card Reader) and in improving the accuracy and readability of the VSCode(TM). During the nine months ended March 31, 2007, we entered into an agreement with a company to design and develop a line of readers to overcome the Company's dependence on outside suppliers. In Phase One of the project, a proto-type cell phone reader designed by the manufacturing company was evaluated and accepted. Phase Two of the project requires the manufacturing company to design and manufacture four individual proto-type models of readers that work with Matrix Symbologies. The agreement requires a deposit of $30,000 and payments of $30,000 for each of the four defined milestones with the total project cost not to exceed $150,000. The project is continuing to progress but at this time no estimate
as to the completion date has been determined. To date the Company has made the required deposit of $30,000 and a $20,000 advance. The Company has entered into an agreement with a software integration company to develop the software necessary to link to a customer's database and to integrate with the software, already developed, to complete the Company's PhoneCodes(C), Technology. We have also been working with the software integrator and a bank to incorporate the VSCode(TM) and banking technology to create the VSCard(C). The VSCard(C), will be the combination of both a debit card and an Identity-Card to create a multi functional ID-card with unique banking and security capabilities.
Settlement with Creditors
As a result of the emergence of the Company from Chapter 11 bankruptcy in March, 2006, the Company recorded income of $9,356,948 from the relief of debt, including $7,874,518 owed to Mitsubishi for the three and nine months ended March 31, 2006 and the relief of debt totaling $1,482,430 from predominantly legal and audit fees for the three and nine months ended March 31, 2006.
Capital Expenditures and Future Commitments
Capital expenditures for the nine months ended March 31, 2007, were $78,178, consisting primarily of $48,000 for software development (included in accounts payable), $18,500 for the development of the PhoneCodes(C) product software and $6,296 for the acquisition of assets from SEI. For the nine months ended March 31, 2006, there were no capital expenditures. Although we continue to try and minimize spending for capital expenditures, we believe our need for additional capital equipment will continue because of the need to develop and expand our business. The amount of such additional capital is uncertain and may be beyond that generated from operations.
Other Assets-Software License
In December, the Company spent $100,000 for the purchase from RBA of an Independent Sales Organization (ISO) license. The license allows the Company to operate as a marketing arm of participating banks and provides the Company's customers a secure banking and debit card system. The Company believes this license is one of the crucial components necessary to take the PhoneCodes(C), product to market. The license also provides the Company the necessary technology to produce and market the VSCard(C). The VSCard(C), will be the combination of both a debit card and an Identity-Card to create a multi functional ID-card with unique banking and security capabilities. The license began to be amortized over a five year period beginning the third quarter of fiscal 2007.
The Company capitalizes software license cost and amortizes the cost over a five year period unless it can be determined by management that the life of the license is either more or less than five years.
Liquidity and Capital Resources
The Company has relied on The Matthews Group for funding. Through March 31, 2007, The Matthews Group has funded $1,740,741, including prepayments, of the original of $2,000,000 stock subscription receivable.
For the three months ended March 31, 2007 and 2006, the Company has recognized infringement revenue of $1,105,966 and $0, respectively, through its relationship with Acacia. It is expected that infringement revenue will decline or cease after the quarter ended March 31, 2007, as the Company's patents are subject to reexamination by the United States Patent and Trademark Office.
Quantitative and Qualitative Disclosures About Market Risk
The Company has not issued or invested in financial instruments or derivatives for trading or speculative purposes. The Company is not actively involved in the trading of foreign currency and fluctuations in currency exchange rates have had no material impact. Although the Company is involved in the sales of its products to the Asian markets, all products are priced in United States Dollars and, as such, sales are not subject to material foreign currency exchange rate risk.
Item 3. Controls and Procedures
Disclosure Controls and Procedures
There were no changes in our internal controls over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of
1934, as amended) that occurred during the quarter ended March 31, 2007 that
have materially affected, or are reasonably likely to materially affect, our
internal controls over financial reporting.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer has evaluated the effectiveness of our internal 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. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective.
Internal Control over Financial Reporting
The quarterly review process in fiscal 2006 and the audits of our June 30, 2006 and 2005 consolidated financial statements revealed a need for stronger controls over our financial reporting system. Improvements needed related to a general lack of accounting staff. During the bankruptcy period, the Company utilized a consultant for its accounting and financial reporting system. As a result, certain controls were limited. When the Company emerged from bankruptcy, we responded to these concerns by hiring a full time Chief Financial Officer.
Our Chief Executive Officer and Chief Financial Officer, do not expect that disclosure controls and procedures will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our Company have been detected. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
During its 1995 -- 1997 bankruptcy, the Company sought an investment group to fund the $2,000,000 required under the Plan of Reorganization approved by the Bankruptcy Court. In the intervening years, various investment groups attempted to help the Company fund this required investment. Partial funding received from these investment groups were settled through stock issuances by the Company. One of these former investment groups made claims totaling $166,697 against the Company, $90,980 in cash and $75,717 in stock (94,646 shares at $.80 per share), but has not pursued legal action relating to these claims. It is possible that other investment groups will assert claims against the Company regarding their efforts to secure funding on behalf of the Company. Management believes these claims were settled in the bankruptcy or are time barred. Due to uncertainties, however, it is at least possible that claims will be asserted. The ultimate outcome of these claims, if asserted, cannot presently be determined.
On June 30, 2000, we were served as a defendant in the matter of Starosolsky vs. Veritec, Inc., et al., in the United States District Court for the Central District of California. This suit was brought by a shareholder and former director of the Company against Veritec and various individuals claiming that certain corporate actions were taken without proper authority of the Company's Board of Directors and/or contrary to the Plan of Reorganization the Company filed and completed under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court in the 1990's. The complaint seeks equitable relief to set aside the issuance of Series H preferred stock (now converted into common stock) issued to The Matthews Group that was authorized by the previous approved bankruptcy reorganization plan in 1999, to prevent The Matthews Group from voting its stock at any meetings of stockholders and to remove certain of the individual defendants as directors of the Company. In December 2000, this case was transferred to the United States District Court for the District of Minnesota. The case has lingered without prosecution for quite some time. We have requested modest discovery from Starosolsky and have received no response. Therefore, we have decided and are taking action to prepare a motion for summary judgment. At this time, management is not able to express an opinion on the likely outcome.
VCode joined with VData as Plaintiffs in patent enforcement litigation filed on October 4, 2005, against Brother Industries, Ltd., Sato Corporation, Toshiba Corporation and US Bank National Association in the United States District Court
for the District of Minnesota alleging violations of the Company's patents. US Bank National Association has entered into a licensing agreement with the Company and the case as to that defendant was dismissed. The remaining defendants, Brother Industries, Ltd., Sato Corporation, and Toshiba Corporation, did not settle but were dismissed from the case without prejudice. VData and the Company must wait for resolution of the patent reexaminations, described below, before re-asserting claims against the defendants. No opinion can be rendered at this time with respect to the outcome of this action as to the remaining defendants.
On March 13, 2006, in response to notices of infringement sent to its customers by VData, Cognex Corporation filed a preemptive action seeking a Declaratory Judgment against VData and the Company in the United States District Court for the District of Minnesota. Amongst other remedies the action seeks a ruling from the court that VCode's United States Patent No. 5,612,524 is not enforceable against Cognex Corporation and its customers, that the Company has defamed Cognex and that the Company has engaged in unfair and deceptive business practices in violation of Minnesota law. On December 27, 2006, an answer and affirmative defense was filed to contest the plaintiff's allegations and claims for damages, injunctive relief, attorney's fees, and costs. A counterclaim was also filed for infringement of United States Patent Nos. 5,612,524. This case has not yet been set for trial. At this point in time, it is too early to evaluate the likelihood of an unfavorable outcome or an estimate of the amount of range of potential loss.
On April 6, 2006, the U.S. Patent and Trademark Office granted a Third Party Request for an Ex Parte Reexamination of VCode's United States Patent No. 5,612,524. A response on behalf of the Company rebutting the allegations in the Request for Reexamination has been filed with the U.S. Patent and Trademark Office. The Company is awaiting a determination by the U.S. Patent and Trademark Office on whether to proceed with the reexamination process or dismiss the request for lack of merit. The Company has been advised by legal counsel that a preemptive filing of such a request for Ex Parte Reexaminations is commonplace in the enforcement areas of patent law and practice. The Company is confident in its patent but is unable to express an opinion at this time with respect to the outcome of the reexamination. However, not all claims of the patent have been challenged and the Company believes that a determination adverse to the patent would not be detrimental to the Company's ability to market its products, but could be detrimental to the collection of licensing fees based upon this patent.
On May 23, 2006, VCode joined with VData as a Plaintiff in a pending patent enforcement litigation filed against Aetna, Inc., PNY Technologies, Inc., Merchants' Credit Guide Co., The Allstate Corporation, and American Heritage Life Insurance Company in the United States District Court for the District of Minnesota alleging violations of the Company's patents. The Allstate Corporation and American Heritage Life Insurance Company have entered into a licensing agreement with the Company and the case; as to those defendants has been dismissed. Aetna, Inc., and Merchants' Credit Guide Co., have filed responsive pleadings in the action. Defendant PNY Technologies, Inc. has counterclaimed with allegations of non-infringement, invalidity, and inequitable conduct and is seeking attorney's fees and costs. Defendant Aetna, Inc. filed a Motion to Dismiss and a Motion for Rule 11 Sanctions. The Court denied both of Aetna's motions. Defendant Merchant's Credit Guide Co. filed a Motion to Stay; Alternative Motion for Sanctions. The Court recently granted Merchants' Motion to Stay and the case is currently stayed pending reexamination of the patents. This case has not yet been set for trial. At this point in time, it is too early to evaluate the likelihood of an unfavorable outcome or an estimate of the amount or range of potential loss.
On October 26, 2006, a Third Party Request for an Ex Parte Reexamination of VCode's United States Patent No. 4,924,078 was made. The Company was awaiting a determination from the U.S. Patent and Trademark Office as to whether a grant of the request for reexamination was merited. On January 17, 2007, the reexamination for United States Patent No. 4,924,078 was ordered. The Company has been advised by legal counsel that a preemptive filing of such a request for Ex Parte Reexaminations is commonplace in the enforcement areas of patent law and practice. The Company is confident in its patent but is unable to express an opinion at this time with respect to the outcome of the reexamination. However, the Company believes that a determination adverse to the patent would not be detrimental to the Company's ability to market its products, but could be detrimental to the collection of licensing fees based upon this patent.
SEC Reporting Obligations
We are subject to the continuing reporting obligations of the Securities Exchange Act of 1934 (the 1934 Act), which, among other things, requires the filing of quarterly and annual reports and proxy materials with the Securities and Exchange Commission (the SEC). Prior to September 1999 and periodically thereafter, including the entire period during our most recent bankruptcy, we did not comply with SEC filing requirements. We have recently filed delinquent reports. To our knowledge, there is no current inquiry or investigation pending or threatened by the SEC in connection with our prior reporting violations. However, there can be no assurance that we will not be subject to such inquiry or investigation in the future. As a result of any potential or pending inquiry by the SEC or other regulatory agency, we may be subject to penalties, including among other things, suspension of trading in our securities, court actions, administrative proceedings, preclusion
from using certain registration forms under the Securities Act of 1933, as amended, injunctive relief to prevent future violations and/or criminal prosecution.
Item 1A. Risk Factors
Risk Factors
Investing in the Company entails substantial risk. In addition to the other risks and uncertainties discussed herein or available from outside sources, a number of risks and uncertainties that could cause actual results to differ materially from the plans, intentions and expectations reflected in or suggested by forward-looking statements of the Company set forth within the body and Exhibits hereof include amongst other things:
We have a History of Operating Losses.
We have a history of operating losses that were a substantial factor in the Company having been twice placed in bankruptcy, once from October 1995 through October 1999 and again from February 2005 through August 2006. In an attempt to halt the continuation of these losses, we are developing new products, entering new markets and developing strategic alliances to grow revenue. There can be no assurance that we will be successful in these efforts, and, even if we are, whether we can become profitable.
Loss of the Services of Key Employees Could Harm Our Operations.
The Company's performance depends on the talents and efforts of our key management and technical employees. The loss of certain key individuals could diminish our ability to maintain relationships with current and potential customers or to meet development and implementation schedules for existing technology and the technology that the Company intends to introduce in the future. Our future success also depends on our continuing ability to identify, hire, train and retain highly qualified technical and managerial personnel. If we fail to attract or retain these key individuals in the future, our business could be disrupted.
Continuing Licensing Revenues from Acacia and Intellectual Property.
The Company is dependent on Acacia for a significant portion of its revenue. In the event of an adverse determination either with regard to the Patent Reexaminations or the Declaratory Judgment, our future ability to obtain licensing fees for United States Patent Nos. 4,924,078 and 5,612,524 could cease. Therefore, this infringement revenue should not be viewed as unlimited and should be considered likely to decline or cease in the near future.
Future challenges of our intellectual property could be made by other claimants. Our business would be materially impacted in the event such claims are raised and ruled against us.
Competition in the Asian Market.
The Company currently relies heavily on its sales to the Asian markets. The cross-licensing agreement we executed with Mitsubishi that allowed for our emergence from bankruptcy and rights to use of the Mitsubishi Error Detection and Correction Technology gave Mitsubishi a license to our VeriCode(R) Technology that has resulted in increased competition. Competition in the Machine Readable Information and symbology sector, coupled with the strain on our relationships with our licensees and distributors while we were in bankruptcy, may continue to impact sales now and into the future.
Dependence on The Matthews Group.
The Company has historically been dependent on The Matthews Group for its financial support. Management does not believe additional monies above the stock subscription obligation will be required in the immediate future. However additional capital may be required at some future point. The Company cannot guarantee that The Matthews Group will continue to provide additional funding.
Ability to Obtain Access to Capital.
Due to the Company's prior bankruptcies and history of losses, the Company's ability to raise funds, whether from lending, selling stock, or other sources, may be difficult to achieve. The Company may need to raise additional
capital for the development or marketing of new products. If the Company cannot raise such capital, or if the cost of such capital is too high, we may be unable to successfully develop and launch new products.
Effect of the Bankruptcy.
Having been in bankruptcy has made it difficult for the Company to establish new trade credit relationships with both vendors and customers. Although the Company believes it will restore its credibility, the lack of trade credit could substantially impair the Company's ability to grow and implement its plans.
Competition.
Our VeriCode(R) and VSCode(TM) Matrix Symbologies compete with
alternative machine-readable codes such as conventional bar code
systems, including UPC, EAN Code 39 and Code 49; and, alphanumeric
systems such as OCR-A, OCR-B, PDF-417, Data Matrix and many others.
Competitors offering alternative symbologies include numerous well
capitalized private and publicly traded companies who offer a wide
variety of bar code systems and solutions, as well as, alternative
product solutions such as Radio Frequency Identification (RFID) and
Global Positioning Satellite (GPS) technology. Our competitors include
but are not limited to: Intermec (NYSE: IN); Siemens Energy and
Automation, Inc., a subsidiary of Siemens AG (NYSE: SI); Symbol
Technologies (NYSE: SBL); and, Zebra Technologies Corporation (NASDAQ:
ZBRA). Competition from such companies may further reduce the future
level of demand for the Company's products and/or the Company's future
margins of profit.
Effect of Bonus.
On February 6, 2007, the Company authorized a bonus to the Company's CEO in the amount of $300,000. The bonus is payable in either cash or stock equivalents to be determined at the sole discretion of the CEO. If the CEO elects to receive such bonus in the form of restricted stock, the stock price to be used to calculate the number of shares of restricted stock will be the closing market price on February 6, 2007 of $1.15 per share. The timing of the bonus payment, either as partial payment or payment in full and the form of the bonus is at the sole discretion of the CEO. Although we believe the bonus payment would only be distributed when the Company has sufficient cash reserves, timing of the bonus payment could have a material impact on the Company's liquidity.
General Conditions Beyond the Companies Control.
The general economic condition of the United States and other regions of the world, work disruptions, labor negotiations both at the Company and with our licensees and distributors, actions of the U.S. and foreign governments, foreign currency exchange rate fluctuations, inflation and other economic events, all to varying degrees, have an effect upon the Company some of which could be a material adverse impact.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
Our Annual Meeting of Shareholders was held on March 2, 2007 at 11:00 a.m. local time at the offices of Lurie Besikof Lapidus & Company, LLP, 2501 Wayzata Boulevard, Minneapolis, Minnesota 55405. Our Board of Directors had fixed the close of business on January 12, 2007, as the record date for the determination of shareholders entitled to receive notice of and to vote at the meeting and any adjournment thereof. The annual meeting had two proposals that were voted upon. Proposal One was for the re-election of Van Tran, Larry Matthews and Dean Westberg as directors of Veritec. Proposal Two recommended the appointment of Lurie Besikof Lapidus & Company, LLP as the Company's independent registered public accounting firm. A quorum of votes existed and both proposals were approved.
The matters voted on at this Annual Meeting and the shares cast for each proposal are shown in the following table.
Shares cast For Against Abstained
Election of Director Nominees:
Ms. Van Thuy Tran 10,319,034 10,318,531 503 0
Larry Matthews 10,319,034 10,303,678 15,356 0
Dean Westberg 10,319,034 10,318,531 503 0
Ratify Lurie Besikof Lapidus
& Company, LLP as the
Independent Public Accounting
Firm: 10,319,034 10,318,531 503 0
|
Item 5. Other Information
None
Item 6. Exhibits
A list of exhibits included as part of this Form 10-QSB is set forth in an Exhibit Index that immediately precedes the exhibits.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this quarterly report on Form 10-QSB for the quarter
ended March 31, 2007 to be signed on its behalf by the undersigned thereunto
duly authorized on the May 14, 2007.
Veritec, Inc.
/s/ Van Thuy Tran -------------------------------------- Van Thuy Tran, Chief Executive Officer /s/ Gerald Fors -------------------------------------- Gerald Fors, Chief Financial Officer |
EXHIBIT INDEX
3(i) Restated Articles of Incorporation of Veritec, Inc. (as an exhibit
hereto).
3(ii) Bylaws of Veritec, Inc. (filed as exhibit 3(ii) to Veritec's Quarterly
Report on Form 10QSB for the quarter ended December 31, 2006, and
incorporated herein by reference).
31. CEO/CFO Certification required by Rule 13a14(a)/15d14(a) under the
Securities Exchange Act of 1934.
32. Veritec, Inc. Certification of CEO/CFO pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).
*99.1 Press Release issued by the Registrant on February 16, 2005, announcing
the adverse ruling against Veritec, Inc., by the International Court of
Arbitration, awarding a monetary judgment in favor of Mitsubishi
Corporation of approximately $8.1 Million; and, enjoining Veritec from
further violations of Mitsubishi's EDAC copyright (filed as Item 9.01
Exhibit 99.1 to Veritec's Form 8-K filed on February 17, 2005 and
incorporated herein by reference)
*99.2 Notice of the Registrant having filed on February 28, 2005, a Petition
for Relief under Chapter 11 of the United States Bankruptcy Code with
the United States Bankruptcy Court, District of Minnesota (Case Number
05-31119) (filed as Item 1.03 Bankruptcy or Receivership to Veritec's
Form 8-K filed February 28, 2005 and incorporated herein by reference)
*99.3 Notice of the Registrant's case in Bankruptcy being converted to
Chapter 7 of the United States Bankruptcy Code (Case Number 05-31119)
(filed as Item 1.03 Bankruptcy or Receivership to Veritec's Form 8-K
filed December 19, 2005 and incorporated herein by reference)
*99.4 Notice of the Registrant's case in Bankruptcy being reconverted to
Chapter 11 of the United States Bankruptcy Code (Case Number 05-31119)
(filed as Item 1.03 Bankruptcy or Receivership to Veritec's Form 8-K
filed March 10, 2006 and incorporated herein by reference)
*99.5 Notice of the Registrant's Third Amended Plan of Reorganization being
confirmed by the United States Bankruptcy Court (Case Number 05-31119)
(filed as Item 1.03 Bankruptcy or Receivership and Item 9.01 Financial
Statements with attached Exhibit 2.1 Order and Notice Confirming Plan
and Fixing Time Limits, dated April 26, 2006; Exhibit 2.2 Debtor's
Third Modified Plan of Reorganization with Settlement Agreement; and,
Exhibit 99.1 Unaudited balance sheet of registrant at April 26, 2006,
to Veritec's Form 8-K filed May 01, 2006 and incorporated herein by
reference)
*99.6 Notice of the Registrant's receipt of "Order and Final Decree Closing
Chapter 11 Case" from the United States Bankruptcy Court (Case Number
05-31119) (filed as Item 1.03 Bankruptcy or Receivership and Item 8.01
Other Events identifying the Press Release issued announcing the same,
to Veritec's Form 8-K filed August 11, 2006 and incorporated herein by
reference).
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With respect to the documents incorporated by reference to this Form 10-QSB, Veritec's Commission File Number is 0-15113.
* As Previously Filed
Exhibit 3(i)
Restated Articles of Incorporation
of Veritec, Inc.,
A Nevada Corporation Pursuant to
Chapter 11 Plan of Reorganization Confirmed May 3, 1997
To The Secretary of State
State of Nevada
It is hereby certified that:
I.
1. The name of the corporation, which is a corporation organized under the laws of the State of Nevada, is Veritec, Inc. (The Corporation).
a. The undersigned are Van Thuy Tran, President, and Jack E. Dahl, Chief Financial Officer and Secretary of the Corporation, respectively.
b. The Corporation's Original Articles of Incorporation were filed with the Nevada Secretary of State on September 8, 1982. Certificates of Amendment to said Articles were filed with the Nevada Secretary of State on:
March 1, 1985
June 1, 1985
January 25, 1993
II.
The principal office or place of business shall be located at:
1430 Orkla Drive Golden Valley, MN 55427-3935
III.
The nature of the business or objectives to be transacted, promoted or carried on by the Corporation shall be research and all other lawful activities.
IV.
The Corporation is authorized to issue only two classes of shares designated "Common Stock" and "Preferred Stock" respectively. The number of shares of stock authorized to be issued is:
Type of Stock Shares Authorized Par Value per share ------------- ----------------- ------------------- Common 20,000,000 No par value per share Preferred 10,000,000 No par value per share |
V.
The Corporation shall, to the extent allowed by law, indemnify any person (including his or her heirs, executors, and administrators) threatened with or made a party to any action, civil or criminal, or investigative by reason of the fact that he or she is a director, officer, employee, or agent of the corporation or is or was serving as director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise of the direction of the Corporation against expenses (including attorney's fees) judgments, fines, and amounts paid in settlement reasonably incurred by him in the connection with such action, suit or proceeding. This right of indemnification is non-exclusive.
VI.
The name and residence address within the State of Nevada of the Corporation's resident agent shall be:
The Corporation Trust Company of Nevada 6100 Neil Rd.
Suite 500
Reno, NV 89511
VII.
The shares of stock of this Corporation shall not be subject to assessment to pay the debts of the Corporation.
VIII.
The duration of the Corporation shall be perpetual.
In the Plan of Reorganization, Confirmed by the Court on May 3, 1997, the Court approved a restatement of the Articles of Incorporation and new By-Laws. The foregoing Articles of Incorporation have been approved by a unanimous vote of the Board of Directors at a Board of Directors Meeting of the Corporation on December 21, 1999, pursuant to 78.315(2) of the Nevada Revised Statutes.
Executed on December 21, 1999
Veritec, Inc.
By /s/ Van Thuy Tran
---------------------------------
Van Thuy Tran
President
By /s/ Jack E. Dahl
---------------------------------
Jack E. Dahl
Secretary
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Exhibit 31
Section 302 CEO/CFO Certification
I, Van Tran, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Veritec, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;
4. The small business issuer's other certifying officer(s) and I am
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for
the small business issuer and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
small business issuer, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this report
based on such evaluation; and
c) Disclosed in this report any change in the small business issuer's
internal control over financial reporting that occurred during the
small business issuer's most recent fiscal quarter (the small
business issuer's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to
materially affect, the small business issuer's internal control
over financial reporting; and
5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting.
IN WITNESS WHEREOF, the undersigned have executed this Certification as of the 14th day of May, 2007.
/s/ Van Thuy Tran -------------------------------------- Van Thuy Tran, Chief Executive Officer |
Exhibit 31
Section 302 CEO/CFO Certification
I, Gerald Fors, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Veritec, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report;
4. The small business issuer's other certifying officer(s) and I am
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for
the small business issuer and have:
a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the small business issuer, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report
is being prepared;
b) Evaluated the effectiveness of the small business issuer's
disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the small business
issuer's internal control over financial reporting that
occurred during the small business issuer's most recent fiscal
quarter (the small business issuer's fourth fiscal quarter in
the case of an annual report) that has materially affected, or
is reasonably likely to materially affect, the small business
issuer's internal control over financial reporting; and
5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting.
IN WITNESS WHEREOF, the undersigned have executed this Certification as of the 14th day of May, 2007.
/s/ Gerald Fors ------------------------------------ Gerald Fors, Chief Financial Officer |
Exhibit 32
VERITEC, INC.
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 (18 U.S.C. 1350)
The undersigned, Van Tran, the Chief Executive Officer and Gerald Fors, the Chief Financial Officer of Veritec, Inc. (the "Company"), individually, has executed this Certification in connection with the filing with the Securities and Exchange Commission of the Company's Quarterly Report on Form 10-QSB for the fiscal quarter ended March 31, 2007 (the "Report").
The undersigned hereby certifies that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and 2 results of operations of the Company as of March 31, 2007 (the last day of the period covered by this Report).
IN WITNESS WHEREOF, the undersigned have executed this Certification as of the 14th day of May, 2007.
/s/ Van Thuy Tran -------------------------------------- Van Thuy Tran, Chief Executive Officer /s/ Gerald Fors -------------------------------------- Gerald Fors, Chief Financial Officer |