----------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE ACT
OF 1934 (No fee required)
For the quarterly period ended December 31, 2006
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 0-15113
VERITEC, INC.
(Exact name of registrant as specified in its charter)
NEVADA
(State or other jurisdiction of incorporation or organization)
95-3954373
(IRS Employer Identification Number)
2445 Winnetka Avenue North, Golden Valley, MN 55427
(Address of principal executive offices, zip code)
763-253-2670
(Registrant's telephone number, including area code)
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 February 13, 2007, the
Company had:
Number of Shares of Common Stock
15,078,598
Transition Small Business Disclosure Format (check one): Yes No X
--- ---
ii
Table of Contents
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 Operations 9
Item 3. Controls and Procedures 13
PART II. OTHER INFORMATION 13
Item 1. Legal Proceedings 13
Item 1A. Risk Factors 15
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits 17
Signatures 17
Exhibits Index 18
iii
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
VERITEC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, June 30,
2006 2006
------------ ------------
(Unaudited) (Audited)
ASSETS
Current Assets:
Cash $ 635,505 $ 898,424
Accounts receivable, net 19,111 59,173
Note receivable 100,000 --
Inventories 11,611 7,495
Prepaid expenses 5,650 4,650
------------ ------------
Total Current Assets 771,877 969,742
Property and Equipment, net 47,072 21,088
Software License 100,000 --
------------ ------------
Total Assets $ 918,949 $ 990,830
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 103,116 $ 37,400
Accrued expenses 116,948 285,372
------------ ------------
Total Current Liabilities 220,064 322,772
Prepayment on Stock and Subscription Receivable -- 92,008
------------ ------------
Total Liabilities 220,064 414,780
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 (292,400) (386,138)
Additional paid-in capital 13,513,447 13,420,192
Accumulated deficit (12,673,948) (12,609,790)
------------ ------------
Total Stockholders' Equity 698,885 576,050
------------ ------------
Total Liabilities and Stockholders' Equity $ 918,949 $ 990,830
============ ============
See notes to condensed consolidated financial statements.
1
VERITEC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended
December 31,
-------------------
2006 2005
-------- --------
Revenues:
License and other $ 92,569 $121,560
Infringement 402,264 119,535
-------- --------
Total Revenues 494,833 241,095
Cost of Sales 10,428 16,286
-------- --------
Gross Profit 484,405 224,809
-------- --------
Operating Expenses:
Selling, general and administrative 392,577 279,606
Research and development 107,491 33,972
-------- --------
Total Operating Expenses 500,068 313,578
-------- --------
Loss from Operations (15,663) (88,769)
Interest Income 7,770 3,525
-------- --------
Net Loss $ (7,893) $(85,244)
======== ========
Loss Per Common Share - Basic and Diluted $ (0.00) $ (0.01)
======== ========
See notes to condensed consolidated financial statements.
2
VERITEC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Six months ended
December 31,
-------------------
2006 2005
-------- --------
Revenues:
License and other $191,897 $618,699
Infringement 661,928 179,053
-------- --------
Total Revenues 853,825 797,752
Cost of Sales 15,538 33,643
-------- --------
Gross Profit 838,287 764,109
-------- --------
Operating Expenses:
Selling, general and administrative 724,057 581,584
Research and development 194,895 58,199
-------- --------
Total Operating Expenses 918,952 639,783
-------- --------
Income (Loss) from Operations (80,665) 124,326
Interest Income 16,507 5,569
-------- --------
Net Income (Loss) (64,158) 129,895
======== ========
Income (Loss) Per Common Share - Basic and Diluted $ (0.00) $ 0.01
======== ========
See notes to condensed consolidated financial statements.
3
VERITEC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six months ended
December 31,
---------------------
2006 2005
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (64,158) $ 129,895
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities:
Depreciation 4,195 3,719
Stock options compensation 75,882 --
Stock compensation 7,500 --
Changes in operating assets and liabilities:
Accounts receivable 40,062 1,153
Inventories (4,116) 2,269
Prepaid expenses (1,000) 5,558
Accounts payables and accrued expenses (97,401) (106,123)
--------- ---------
Net cash provided (used) by operating activities (39,036) 36,471
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Advance on note receivable (100,000) --
Purchases of equipment (23,833) --
Purchases of software license (100,000) --
--------- ---------
Net cash used by investing activities (223,883) --
--------- ---------
NET INCREASE (DECREASE) IN CASH (262,919) 36,471
CASH AT BEGINNING OF PERIOD 898,424 432,518
--------- ---------
CASH AT END OF PERIOD $ 635,505 $ 468,989
========= =========
NONCASH ACTIVITIES
Applied accrued expenses and prepayment on
subscription receivable to subscription
receivable $ 111,111 $ 111,111
Purchase of assets of Secure Environments, Inc.
in year end accrued expenses $ 6,296 $ --
See notes to condensed consolidated financial statements.
4
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 six month periods ended December
31, 2006, 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 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. In
addition to the United States patents owned by VCode, Veritec 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.
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 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 thereof. VCode in turn entered into an Exclusive License
Agreement with VData LLC (VData), an Illinois limited liability company
unrelated to Veritec. The purpose of the Exclusive 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.
5
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.
E. NET INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per common share is computed by dividing income
(loss) available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted net income (loss) per common share,
in addition to the weighted average determined for basic net income (loss) per
common share, includes potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into common
stock. Potentially dilutive instruments include stock options, warrants and
preferred stock. For three months ended December 31, 2006 and 2005, and the six
months ended December 31, 2006, the stock options, warrants and preferred stock
were antidilutive and, therefore, were not included in the computations of
diluted net loss per common share.
The weighted average shares outstanding were 15,078,598 for all periods
presented.
Diluted net income per common share for the six months ended December 31, 2005,
was computed as follows:
Net income for per share computation $ 129,895
===========
Weighted average shares outstanding 15,078,598
Incremental shares from assumed exercise or conversion of dilutive
instruments:
Options and warrants 15,000
Preferred stock 10,000
-----------
Shares outstanding - diluted 15,103,598
===========
Net income per common share $ 0.01
===========
F. STOCK-BASED COMPENSATION
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (SFAS) No. 123(R), "Share-Based Payment", in December 2004,
which 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 new rule allowed companies to implement SFAS No. 123(R) at the
beginning of their fiscal year that begins after June 15, 2005. Under the new
rule, SFAS No. 123(R) became effective for the Company on July 1, 2005. Adoption
of SFAS No. 123(R) had no impact on the Company's financial statements as all
options were fully-vested at the adoption date.
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
6
grant, the options vest one year from the date of grant, and the options expire
five years after vesting. For the three months ended December 31, 2006, the
Company issued 6,666 options under one such agreement. At December 31, 2006, the
Company has commitments under these agreements to issue grants of options of
30,000 for fiscal year 2007, 70,000 options annually for 2008 through 2010, and
40,000 options in fiscal 2011.
The weighted-average fair value of options granted for the three months
ended December 31, 2006, was $0.28 per option and was estimated using the
Black-Scholes option pricing model with the following weighted-average
assumptions: risk free interest rate - 4.51%, dividend yield - 0%, volatility -
6.27%, and expected life - 3 years. Volatility was extracted from the small
market capitalization under computer service subsector. Stock-based compensation
expense of $9,880 and $0 was recognized in the three months ended December 31,
2006 and 2005, respectively. Stock-based compensation expense of $75,882 and $0
was recognized in the six months ended December 31, 2006 and 2005, respectively.
As of December 31, 2006, there was $17,133 of unrecognized compensation costs
related to stock options. These costs are expected to be recognized over the
next two quarters.
A summary of stock options is as follows:
Number of Option Price
Shares Per Share
--------- -------------
Balance at June 30, 2006 30,000 $2.04
Granted 40,000 $0.25
Granted 46,666 $0.94 - $1.36
-------
Balance at December 31, 2006 116,666* $0.25 - $2.04
=======
* 40,000 shares fully vested, 76,666 shares vest in fiscal 2007; 5.2 years
remaining contractual life.
There was no option activity for the three months end December 31, 2005.
The Company had 15,000 options outstanding and exercisable at $0.80 per share at
December 31, 2005; these options expired unexercised.
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 six months ended December 31, 2006. The issuance of the stock
remains unsatisfied.
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 December 31, 2006,
stock and stock options totaling 424,166 have been committed under this
authorization. In January 2007, an additional 15,000 shares of common stock and
140,000 of stock options have been committed under this authorization bringing
the total commitment to 579,166.
G. NOTE RECEIVABLE
In December 2006, the Company loaned $100,000 to RBA International, Inc. 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.
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 repayment of the note required
the issuance of 2,500 shares of common stock, among other items. This note
payable was repaid in August 2004. The issuance of the 2,500 shares of common
stock remains unsatisfied.
7
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 noninterest bearing.
J. OTHER SIGNIFICANT EVENTS
In January 2007, the Company loaned $300,000 to RBA International, Inc. in
exchange for a promissory note from RBA International, Inc., and related
individuals. The note bears annual interest at 10% and is due on or before March
1, 2007 and is collateralized by certain assets of RBA International, Inc.
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 International,
Inc., by the Company. The Company has been granted an exclusive right to
purchase a majority ownership in RBA International, Inc. on or before January 5,
2008.
In January 2007, the Company, signed a work order with RBA International,
Inc. in the amount of $48,000 for the analysis and design of a website that
allows an individual to order tickets or gift cards, the ability to make and
accept payments via debit or credit cards and integrate with our PhoneCodes(C)
software and ultimately send notification along with the VeriCode(R) to the
recipient's cell phone.
In January 2007, the Company signed a Value Added Reseller (VAR) agreement
with DataCard Group, Minnetonka, Minnesota. The agreement provides 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 with a design and
manufacturing company to design and build a line of readers to overcome the
Company's dependence on outside suppliers. We have been evaluating a proto-type
cell phone reader designed by the manufacturing company. Upon acceptance of the
proto-type reader, the Company plans to sign a contract with 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 expected to take
approximately four months. As of this filing, $50,000 has been paid towards this
agreement.
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.
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 us on July 1, 2007. We
are currently evaluating the effect of this standard on our consolidated
financial statements.
8
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
Stock-Based Compensation
The Company followed the accounting guidance of Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees", for
measurement and recognition of stock-based transactions with employees. No
compensation cost was recognized for options issued when the exercise price of
the options was at least equal to the fair market value of the common stock at
the date of grant. Had compensation cost for the stock options issued been
determined based on the fair value at the grant date, consistent with the
provisions of Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation", the effect on the Company's 2007 net
loss and loss per common share would have been insignificant.
The Financial Accounting Standards Board issued SFAS No. 123(R),
"Share-Based Payment", in December 2004, which 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 new rule allowed
companies to implement SFAS No. 123(R) at the beginning of their fiscal year
that begins after June 15, 2005. Under the new rule, SFAS No. 123(R) became
effective for the Company on July 1, 2005.
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
9
"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 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 along with the readers/scanners
that are needed to read the code.
The Company also receives fees from the enforcement and licensing of its
patents under its Exclusive License Agreement with Acacia.
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 is developing
its presence in the secure identification and access control markets by teaching
the means to utilize the VSCode on 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 December 31, 2006 and 2005, the Company
recognized infringement revenue of $402,264 and $119,535, respectively, through
its relationship with Acacia. For the six months ended December 31, 2006, the
Company recognized infringement revenue of $661,928 compared to infringement
revenue of $179,053 for the six months ended December 31, 2005. The Company
recognizes infringement revenue upon the completion of all required terms under
the agreement with VData and when collection is assured. Infringement revenue,
beyond the third quarter ending March 31, 2007, when considering the potential
adverse determination in regard to the Patent Reexaminations or the Declaratory
Judgment of Patent Nos. 4,924,078 and 5,612,524, should not be viewed as
unlimited and should be considered likely to decline or cease in the near
future.
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.
10
Results of Operations - December 31, 2006 compared to December 31, 2005
Revenues
Revenues of $494,833 for the three months ended December 31, 2006 increased
by $253,738 or 105% higher than for the same period ended December 31, 2005. For
the three months ended December 31, 2006, software license sales were down by
$26,708, hardware sales were lower by $10,159, secure ID card sales increased by
$7,876 and infringement settlements were higher by $282,729.
The Company is continuing to see declining software license and hardware
sales from our distributors 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. Another 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. The decline in revenue was offset by
infringement revenue from Acacia of $402,264 for the three months ended December
31, 2006, compared to $119,535 for the same period in 2005. The decline in
revenue was also offset by increased sales of secure ID card sales, totaling
$7,883 for the three months ended December 31, 2006 compared to $7 for the three
month period ended December 31, 2005. The increase in card sales was the direct
result of the acquisition of SEI, Inc.
Revenues of $853,825 for the six months ended December 31, 2006, increased
by $56,073 or 7% more than for the same period ended December 31, 2005. For the
six months ended December 31, 2006, software license sales were down by
$425,610, hardware sales were less by $9,026, secure ID card sales increased by
$7,834, and infringement settlements were higher by $482,875.
The decline in, software license sales and hardware sales and the increase
in secure ID card sales for the six months ended December 31, 2006, compared to
the same period in 2005 are for the same reasons as explained for the three
month period above. Infringement revenue from Acacia of $661,928 for the six
months ended December 31, 2006 increased by $482,875 compared to the six months
ended December 31, 2005, which reflects Acacia's strong efforts to settle with
infringers. For the six month period ended December 31, 2006, infringement
revenue received from Acacia was 78% of the total revenue compared to 22% for
the same period in 2005.
Cost of Sales
Cost of sales of $10,428 for the three months ended December 31, 2006,
decreased by $5,858 or 36% from the same period in 2005, and decreased 4.7% as a
percent of sales for the quarter. For the three months ended December 31, 2006,
the cost of hardware sales decreased $6,549 but increased as a percentage of
sales by 0.8% compared to the same period for the previous year, whereas the
cost of software licenses for the quarter ended December 31, 2006 decreased
$1,242 compared to the same period in 2005. Software license cost for the three
month period ended December 31, 2006, compared to the same three month period of
2005 decreased as a percentage of sales by 0.8%. The increased hardware cost of
0.8%, as a percentage of sales, was the result of the Company accepting higher
costs of 53% and lower margins of 47% on the equipment portion of a sale to a
local customer, which was done as an enticement to obtain the business.
Cost of sales for the six months ended December 31, 2006, totaled $15,538
and for the six months ended December 31, 2005, cost of sales were $33,643 a
decrease of $18,105. As a percentage of sales, for the six month period ended
December 31, 2006, cost of sales was 1.8% compared to 4.2% for the six months
ended December 31, 2005. The infringement revenue received from Acacia which
carries no cost caused cost of sales as a percentage of revenue for the six
months ended December 31, 2006 compared to the same period in 2005 to decrease.
Selling General and Administrative
Selling, general and administrative expenses of $392,577 for the three
months ended December 31, 2006, increased by $112,971 or 40% from the same
period in 2005. The increase was in part the result of marketing expense
totaling $63,793. Since emerging from bankruptcy the Company has added a V.P. of
Sales and Marketing, a salesperson to market and grow the secure ID card
business, acquired SEI, Inc., and contracted with several consulting firms in
order to market the Company's products. For the three months ended December 31,
2005, the Company had no sales and marketing employees and used minimal
consultants. For the three months ended December 31, 2006, payroll costs for
sales and marketing totaled $46,458
11
and consultant costs were $16,350. Professional fees for legal and audit
services increased by $65,459 for the three month period ended December 31,
2006, compared to the same period in 2005. For the second quarter of Fiscal
2007, the Company recognized increased professional fees as a result of the
Company's effort to become current with its SEC reporting.
For the six months ended December 31, 2006, selling, general and
administrative expenses were $724,057 and $581,584 for the six months ended
December 31, 2005 an increase of $142,473. For the six months ended December 31,
2006, travel costs increased $11,009, selling and marketing expense increased
$69,238, professional services increased $62,611 and all other expenses
decreased $385 compared to the same six month period in 2005.
Research and Development
Research and development expense of $107,491 for the three months ended
December 31, 2006 increased by $73,519 from 2005. Research and development
expense was $194,895 for the six month period ended December 31, 2006 and
$58,199 for the six months ended December 31, 2005. The increase for both the
three and six month periods was the result of the resumption of research and
development efforts since emerging from bankruptcy. We have concentrated our
engineering efforts to finalize the development and production of the FCR-100
Finger Print reader and in improving the accuracy and readability of the VSCode.
During the three months ended December 31, 2006, we entered into an agreement
with a design and manufacturing company to design and manufacture a line of
readers to overcome the Company's dependence on outside suppliers. We have been
evaluating a proto-type cell phone reader designed by the manufacturing company.
The Company has also entered into an agreement with a software integration and
banking firm to develop the back end software necessary to link a customer's
database and the Company's PhoneCodes(C) Technology. We are also working with
this banking firm to incorporate the VSCode and their banking technology to
develop the VSCard(C). The VSCard(C) will be the combination of both a Visa
debit card and an Identity-Card to create a multi functional ID-card with unique
banking and security capabilities.
Capital Expenditures and Future Commitments
Capital expenditures for the six months ended December 31, 2006, were
$30,179, of which $18,500 was for the development of the PhoneCodes(C) product
software and $6,296 was for the assets of the SEI acquisition. For the six
months ended December 31, 2005, 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 of an Independent
Sales Organization (ISO) license. The license allows the Company the
capabilities of operating as a marketing arm of participating banks and
providing 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 Visa debit card and an Identity-Card to create a multi
functional ID-card with unique banking and security capabilities. The license
will 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 December
31, 2006, The Matthews Group has funded $1,685,185, including prepayments, of
the original of $2,000,000 stock subscription receivable.
For the three months ended December 31, 2006 and 2005, the Company has
recognized infringement revenue of $402,264 and $119,535, respectively, through
its relationship with Acacia. It is expected that infringement revenue will
decline or cease after the quarter ending March 31, 2007, as the Company's
patents are subject to reexamination by the United States Patent and Trademark
Office.
As of February 13, 2007, the Company, after having received the third
quarter payment of infringement revenue of $1,105,966, had consolidated cash
balances of $1,252,128, which, we believe is sufficient to meet our short-term
needs. However, the Company may need additional capital to continue to develop
and expand.
12
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 December 31, 2006 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
13
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.
Consequently, 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. 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 re-exam 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. A response on
behalf of the Company rebutting the allegations in the Request for Reexamination
will be filed with the U.S. Patent and Trademark Office. Once the response has
been filed, the Company will await a determination by the U.S. Patent and
Trademark Office on whether they will 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, 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.
14
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 impact future sales.
15
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 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.
16
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the period
covered by this report.
Item 5. Other Information
We will be having our Annual Meeting of Shareholders 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 has 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.
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 December 31, 2006 to be signed on its behalf by the undersigned thereunto
duly authorized on the February 14, 2007.
Veritec, Inc.
/s/ Van Thuy Tran
----------------------------------------
Van Thuy Tran, Chief Executive Officer
/s/ Gerald Fors
----------------------------------------
Gerald Fors, Chief Financial Officer
17
EXHIBIT INDEX
3(ii) Current Bylaws of Veritec, Inc. as amended.
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).
With respect to the documents incorporated by reference to this Form
10-QSB, Veritec's Commission File Number is 0-15113.
* As Previously Filed
18