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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 March 31, 2007
--------------
[ ] 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
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VERITEC, INC.
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(Exact name of registrant as specified in its charter)
NEVADA
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(State or other jurisdiction of incorporation or organization)
95-3954373
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(IRS Employer Identification Number)
2445 Winnetka Avenue North, Golden Valley, MN 55427
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(Address of principal executive offices, zip code)
763-253-2670
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(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 May 14, 2007,
the Company had:
Number of Shares of Common Stock
- -------------------------------------------------------
15,078,598
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Transition Small Business Disclosure Format (check one): Yes [ ] No [X]
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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
ii
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
VERITEC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
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
============ =============
</Table>
See notes to condensed consolidated financial statements.
1
VERITEC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<Table>
<Caption>
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
============ =============
</Table>
See notes to condensed consolidated financial statements.
2
VERITEC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<Table>
<Caption>
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
============ =============
</Table>
See notes to condensed consolidated financial statements.
3
VERITEC, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<Table>
<Caption>
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 --
</Table>
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 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.
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 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:
<Table>
<Caption>
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
============= ============= ============ =============
</Table>
6
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:
<Table>
<Caption>
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
============
</Table>
*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
7
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
8
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
9
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
10
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
11
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
12
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.
13
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
14
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
15
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
16
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.
17
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
18
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).
With respect to the documents incorporated by reference to this Form
10-QSB, Veritec's Commission File Number is 0-15113.
* As Previously Filed
19