UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
X Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act
- ----- of 1934 (No Fee Required)
For the quarterly period ended March 31, 2001
Transition Report Under Section 13 or 15(d) of the Securities Exchange Act
of 1934 (No Fee Required)
For the transition period from to .
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Commission file number 0-15113
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VERITEC INC.
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(Exact Name of Small Business Issuer as Specified in its Charter)
Nevada 95-3954373
----------------- ----------------------
(State or Other Jurisdiction of (IRS Employer ID Number)
Incorporation or Organization)
1000 Boone Avenue North, Suite 110, Golden Valley, Minnesota 55427
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(Address of Principal Executive Offices)
763-525-8470
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(Issuer's Telephone Number Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by section
13 or 15(d) of the Securities Exchange Act during the past 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
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APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
Number of shares of common stock outstanding as of April 13, 2001: 6,550,015
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i
INDEX
VERITEC INC.
PART I, FINANCIAL INFORMATION
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Page
----
Item 1. Financial Statements (Unaudited).
Condensed balance sheets as of March 31, 2001
and June 30, 2000 2
Condensed statements of operations for the
three months and nine months ended March 31, 2001
and 2000 3
Condensed statements of cash flow for the nine months
ended March 31, 2001 and 2000 4
Notes to condensed financial statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II. OTHER INFORMATION
- -------------------------------
Item 1. Legal Proceedings 12
Item 2. Change in Securities 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
SIGNATURES 13
1
Item 1. Financial Statements (Unaudited)
VERITEC INC.
CONDENSED BALANCE SHEETS
(Unaudited)
March 31, June 30,
2001 2000
------------ ----------------
ASSETS
------
Current assets:
Cash $ 186 $ 3,964
Accounts receivable:
Trade 23,422 19,650
Other - 30,000
Inventories - 44,559
Prepaids 2,500 2,500
----------- -----------
Total current assets 26,108 100,673
Furniture and equipment, net 7,319 7,200
Intangible asset, net 143,335 173,333
----------- -----------
Total assets $ 176,762 $ 281,206
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
Current liabilities:
Notes payable (secured) $ - $ 108,366
Convertible note (secured) 397,374 252,322
Bank overdraft 9,574 35,362
Accounts payable and accrued expenses 159,158 194,381
Disputed liabilities 217,702 217,702
----------- -----------
Total current liabilities 783,808 808,133
Commitments and contingencies - -
----------- -----------
Total liabilities net 783,808 808,133
----------- -----------
Prepayment on stock and subscription
receivable net 253,233 18,047
----------- -----------
Stockholders' equity (deficit):
Preferred stock: par value $1.00,
authorized 10,000,000 shares,
275,000 shares of Series H authorized 366,007 366,007
Common stock, par value $.01,
authorized 20,000,000 shares 66,558 65,306
Subscription receivable (1,133,711) (1,212,049)
Additional paid-in capital 11,576,563 11,431,439
Accumulated deficit net (11,735,696) (11,195,678)
----------- -----------
Total stockholders' equity (deficit) (860,279) (544,975)
----------- -----------
Total liabilities and
stockholders' equity (deficit) net $ 176,762 $ 281,206
=========== ===========
See notes to financial statements.
2
VERITEC INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
2001 2000 2001 2000
---------- ---------- ---------- ----------
Revenues $ 50,631 $ 840,306 $ 175,655 $1,072,958
Cost of sales 80 268,013 51,382 334,943
---------- ---------- ---------- ----------
Gross profit 50,551 572,293 124,273 738,015
Commissions - 245,667 4,248 301,809
---------- ---------- ---------- ----------
Gross profit after
commissions 50,551 326,626 120,025 436,206
---------- ---------- ---------- ----------
Operating expenses:
Engineering 58,152 68,537 137,758 160,325
Marketing 18,931 40,545 27,837 73,953
Administrative 152,194 47,435 475,694 155,943
---------- ---------- ---------- ----------
Total operating expenses 229,277 156,517 641,289 390,221
---------- ---------- ---------- ----------
Income (loss) from operations (178,726) 170,109 (521,264) 45,985
Interest income - 31,327 49 106,714
Interest expense (11,261) (24,079) (39,092) (49,742)
Income taxes - - - -
---------- ---------- ---------- ----------
Net income (loss) (189,987) 177,357 (560,307) 102,957
Other comprehensive income
(expense) - - - -
---------- ---------- ---------- ----------
Comprehensive income (loss) $ (189,987 $ 177,357 $ (560,307) $ 102,957
========== ========== ========== ==========
Basic loss per common share $ (.03) $ .03 $ (.09) $ .02
========== ========== ========== ==========
Weighted average common
shares outstanding 6,655,939 6,501,572 6,582,468 4,357,091
========== ========== ========== ==========
See notes to financial statements.
3
VERITEC INC.
CONDENSED STATEMENTS OF CASH FLOW
(Unaudited)
Nine Months Ended
March 31,
2001 2000
------------ -------------
Cash flows from operating activities:
Net income (loss) $ (560,307) $ 102,957
Adjustments to reconcile net income (loss)
to cash flows from operating activities:
Depreciation and amortization 33,118 20,187
Interest converted to note 36,686 -
Accounts receivable 26,228 (270,857)
Inventory 44,559 (71,863)
Other assets - (8,127)
Bank overdraft (25,788) -
Accounts payable and other liabilities 43,111 (238,552)
---------- ----------
Cash flows from operating activities (402,393) (466,255)
---------- ----------
Cash flows from investing activities:
Purchases of fixed assets (3,238) -
Purchase of intangible assets - (200,000)
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Cash flows from investing activities (3,238) (200,000)
---------- ----------
Cash flows from financing activities:
Issuance of notes payable - 105,000
Conversion of debt to common stock - 720,442
Payments on subscription receivable 166,667 78,470
Prepayment on subscription receivable 235,186 12,243
Issuance of preferred stock from advances - (240,148)
---------- ----------
Cash flows from financing activities 401,853 676,007
---------- ----------
Increase (decrease) in cash (3,778) 9,752
Cash:
Beginning of period 3,964 3,664
---------- ----------
End of period $ 186 $ 13,416
========== ==========
See notes to financial statements.
4
VERITEC INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2001
(Unaudited)
A. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB of
Regulation S-B. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles 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 nine-month period ended March 31, 2001 are not necessarily
indicative of the results that may be expected for the year ending June
30, 2001. For further information, refer to the financial statements and
footnotes thereto included in the Company's Form 10-KSB filing for the
period ended June 30, 2000.
Company
- -------
Veritec Inc. (the "Company") was incorporated in Nevada on September 8, 1982.
The Company is primarily engaged in the development, marketing and sales of a
line of microprocessor-based encoding and decoding system products that utilize
its patented Vericode Symbol technology. The Company's VeriSystem enables a
manufacturer or distributor to attach unique identifiers or coded symbols
containing binary encoded data to a product which enables automatic
identification and collection of data. The Company has also developed its
Veritaggant Covert Identification System, which enables the application of a
label or tag to a product for subsequent verification of its authenticity. The
Veritaggant Covert Identification System is not currently being marketed by the
Company.
Revenue Recognition
- -------------------
Revenues from products sales and engineering are recognized when products are
shipped or services are performed. License fees are recognized upon completion
of all required terms under the agreement.
Royalties are recognized as earned. To date these royalties have been earned in
a foreign currency. The Company records these revenues in U.S. dollars at the
exchange rate in effect at the date of remittance. Accordingly, the Company has
historically not been susceptible to translations gains or losses.
Intangible Assets
- -----------------
On October 12, 1999, the Company purchased certain software, source code,
documentation, manuals and other written material for $50,000 and 187,500 shares
of restricted common stock valued at $.80 per share. The Company has recorded
this purchased software at cost, $200,000, and is amortizing it over 10 years
using the straight-line method.
(Continued)
5
VERITEC INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2001
(Unaudited)
Computer Software Costs
- -----------------------
Pursuant to Statement of Financial Accounting Standards ("SFAS") No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed," issued by the Financial Accounting Standards Board, the Company is to
capitalize certain software development and production costs once technological
feasibility has been achieved. Software development costs incurred prior to
achieving technological feasibility were expensed as incurred.
Management determined that technological feasibility occurred at the time the
Company's software was available for general release to customers. Accordingly,
no computer software development costs have been capitalized in the accompanying
financial statements. In accordance with SFAS No. 86, costs of software
maintenance and customer support since the software became available for general
release have been charged to expense as incurred.
Long-Lived Assets
- -----------------
In accordance with SFAS 121, "Accounting For The Impairment Of Long-Lived Assets
And For Long-Lived Assets To Be Disposed Of," the Company reviews its long-lived
assets and intangibles related to those assets periodically to determine
potential impairment by comparing the carrying value of the long-lived assets
outstanding with estimated future cash flows expected to result from the use of
the assets, including cash flows from disposition. Should the sum of the
expected future cash flows be less than the carrying value, the Company would
recognize an impairment loss. An impairment loss would be measured by comparing
the amount by which the carrying value exceeds the fair value of the long-lived
assets and intangibles.
Earnings (Loss) Per Share ("EPS")
- ---------------------------------
Basic EPS excludes dilution and is computed by dividing net income by the
weighted-average number of common shares outstanding for the year. Diluted EPS
reflects the potential dilution from conversion of Series H preferred stock or
the exercise of options and/or warrants, and is computed using the treasury
stock method. Under the treasury stock method stock options are assumed to have
been exercised at the beginning of the period if the exercise price exceeds the
average market price during the period. The computation of diluted EPS does not
assume conversion, exercise or contingent issuance of securities that would have
an antidilutive effect on the calculation of earnings per share.
(Continued)
6
VERITEC INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2001
(Unaudited)
Concentrations, Risks and Uncertainties
- ---------------------------------------
Subscription Receivable
-----------------------
The Company's largest asset (presented as a contra equity amount in the
accompanying financial statements) is the subscription receivable from The
Matthews Group. This subscription receivable is secured by a pledge of
properties controlled by a principal of The Matthews Group. The Company has
not perfected a security interest in the pledged properties and accordingly,
this note is unsecured.
Management has deemed this receivable to be fully collectible. Due to
uncertainties in the collection process, however, it is at least reasonably
possible that management's estimate will change during the next year. That
amount, if any, cannot be estimated.
Financing Concentration
-----------------------
The Company is dependent on The Matthews Group to meet operating needs and
to make payments on secured promissory notes.
Disputed Liabilities
--------------------
The disputed liabilities primarily relate to the bankruptcy period and
claims against the Company from before the bankruptcy period. The Company
feels that these claims are without merit and/or were discharged in the
bankruptcy.
The balance of the disputed liabilities relate to an agreement entered into
with a former employee of the Company. The Company takes the position that
these amounts are no longer owing because this former employee breached the
terms of this agreement. The Company has commenced litigation against this
former employee for breaching this agreement. See Legal Proceedings.
NOTE 2 - GOING CONCERN
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As shown in accompanying financial statements,
the Company has incurred recurring net losses. The Company has a working capital
deficiency and a stockholders' deficit. Those conditions raise substantial doubt
about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
In September 1999, The Matthews Group committed to:
* Invest the $2,000,000 in assets required under the Plan of Reorganization,
* Pay the delinquent amounts due under the secured promissory notes, and
* Finance the operations of the Company.
(Continued)
7
VERITEC INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2001
(Unaudited)
To date The Matthews Group has funded $351,852 under the subscription receivable
and made prepayments on the subscription receivable of $253,233 to assist the
Company in meeting its cash flow needs. The Matthews Group has further made
payments and incurred costs totaling $397,374 on the secured notes to prevent
the secured note holders from foreclosing. The Matthews Group has indicated it
will continue to meet its obligation under the subscription receivable. The
Matthews Group has further indicated it will continue to fund additional amounts
into the Company as needed.
The Company's management is aggressively pursuing new sales opportunities for
the Company. The Company's management is also investigating potential
acquisitions that are felt to increase the Company's viability. Management is
hopeful it will be successful in these efforts and that the Company will
continue as a going concern which will allow it to realize assets and settle
liabilities in the normal course of operations.
Convertible Note - The Matthews Group
- -------------------------------------
On December 1, 2000, The Matthews Group, LLC paid the note held by the Gant
Group in full. As a result of this payment the liens held by the Gant Group have
been assigned to The Matthews Group.
The terms of the convertible note payable have yet to be formalized, but it is
anticipated this note will bear interest at 10% and will be convertible into
shares of the Company's common stock at $.10 per share consistent with an
earlier agreement between the Company and The Matthews Group.
Subscription Receivable
- -----------------------
In September 1999, the Company accepted a commitment from The Matthews Group,
LLC to fund the $2,000,000 required under the Plan of Reorganization. This
funding is in the form of a promissory note that calls for 108 monthly payments
to the Company of $18,518.52. These payments are non interest bearing and are
secured by a pledge of properties controlled by a principal of The Matthews
Group. Allegations have been made, but not filed, that the pledged properties do
not sufficiently collateralize the subscription receivable and/or that the
nature, encumbrances or ownership of the pledged properties was not properly
disclosed. Regardless of these allegations, the Company has not perfected a
security interest in the pledged properties and accordingly, this note is
unsecured.
(Continued)
8
VERITEC INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2001
(Unaudited)
The present value of the subscription receivable, using a ten percent interest
factor, is as follows:
Future
Dollar Imputed Present
Amount Interest Value
---------- ----------- ----------
At inception $2,000,000 $ (684,641) $1,315,359
Imputed interest through
March 31, 2001 - 170,204 170,204
Subscription payments
through March 31, 2001 (351,852) - (351,852)
---------- ---------- ----------
At March 31, 2001 $1,648,148 $ (514,437) $1,133,711
========== ========== ==========
Prepayment on Subscription Receivable
- -------------------------------------
Non interest bearing advances have been made against the subscription
receivable. It is assumed the prepayment will also ultimately be applied against
the subscription receivable.
(Continued)
9
VERITEC INC.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Business Overview:
Financial and Operational Outlook
- ---------------------------------
Royalties from sales by Mitsubishi continue to be received, and are anticipated
to bring a stream of revenue into the Company.
The Company continues to work closely with its Korean distributor to promote
Vericode in various flat panel display manufacturing plants.
The Company has developed a prototype image capture system, based on Microsoft
Windows(R) standards and using a USB bus. Management anticipates that this
prototype will lead to the availability of a more competitive reader for
Vericode.
The Company recently carried out contract negotiations with a U.S. customer for
delivery of Vericode-reading software, for incorporation into the customer's
hardware system. The Company hopes that such sales will generate a substantial
amount of revenue for the Company and reduce or eliminate the need for the
Company to design, manufacture, and sell hardware. Management hopes that this
will result in an increase in operating profit.
Several factors may act to reduce the Company's revenue. First, the worldwide
slowdown in electronics manufacturing may constrain Veritec's customers' ability
to make capital improvements. Second, price competition with Mitsubishi appears
to be intensifying.
Liquidity and Capital Resources:
Results of Operations
- ---------------------
|------------------------------------------------------------------------|
| Revenue for the quarter ending March 31, |
|------------------|-------------------------|---------------------------|
| | 2001 | 2000 |
|------------------|-------------------------|---------------------------|
|Revenues | $50,631 | $840,306 |
|------------------------------------------------------------------------|
Revenues for the quarter were $50,631, down from $840,406 in the same quarter in
2000. The revenues in 2001 resulted from royalty payments from Mitsubishi. The
large decrease from 2000 reflects the lack of sales to flat panel display
manufactures.
10
|------------------------------------------------------------------------|
| Revenue for the nine months ending March 31, |
|------------------|-------------------------|---------------------------|
| | 2001 | 2000 |
|------------------|-------------------------|---------------------------|
|Revenues | $175,655 | $1,072,958 |
|------------------------------------------------------------------------|
Revenues for the nine months ending March 31, 2001 were $175,655, down from
$1,072,958 in the same period in the previous fiscal year. The revenues in the
current nine months resulted from royalty payments from Mitsubishi and from
replacement/repair sales to flat panel manufacturers. The large decrease from
2000 reflects the lack of sales to flat panel display manufactures for new
factories.
|------------------------------------------------------------------------------|
| Operating Expenses for the quarter ending March 31, |
|--------------------------|------------------------|--------------------------|
|Expense Category | 2001 | 2000 |
|--------------------------|------------------------|--------------------------|
|Engineering R&D | $58,152 | $68,537 |
|--------------------------|------------------------|--------------------------|
|Sales and Marketing | $18,152 | $40,545 |
|--------------------------|------------------------|--------------------------|
|General and Administrative| $152,194 | $47,435 |
|--------------------------|------------------------|--------------------------|
|Total | $229,277 | $156,517 |
|------------------------------------------------------------------------------|
Expenses for the quarter were $229,277, up 46% from the same quarter in 2000.
This increase largely reflects costs associated with the addition of new
employees.
|------------------------------------------------------------------------------|
| Operating Expenses for the three quarters ending March 31, |
|--------------------------|------------------------|--------------------------|
|Expense Category | 2001 | 2000 |
|--------------------------|------------------------|--------------------------|
|Engineering R&D | $137,758 | $160,325 |
|--------------------------|------------------------|--------------------------|
|Sales and Marketing | $27,837 | $73,953 |
|--------------------------|------------------------|--------------------------|
|General and Administrative| $475,694 | $155,943 |
|--------------------------|------------------------|--------------------------|
|Total | $641,289 | $390,221 |
|------------------------------------------------------------------------------|
Expenses for the nine months ending March 31, 2001 were $641,289, up 64% from
the same nine months in the previous fiscal year. This increase largely reflects
costs associated legal fees and with the addition of new employees.
Capital Expenditures and Future Commitments/Customer prepayments
- ----------------------------------------------------------------
No capital expenditures were made in the quarter. An early pre-payment of
$135,000 was received in April, 2001 from a U.S. customer for software
development and licensing. This customer has agreed to pay an additional $6,500
per software and license for products delivered in the next quarter. This
prepayment improves the Company's cash position.
11
VERITEC INC.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Litigation
- ----------
As explained more completely in Form 10-KSB filed for the period ending June 30,
2000 by the Company, a shareholder is suing the Company and various individuals
alleging actions were taken without proper authority of the corporation's board
of directors and/or contrary to the plan of reorganization the corporation filed
and completed under Chapter 11 of the U.S. Bankruptcy Act. During the quarter
ending December 31, 2000, the California court granted a motion to transfer the
suit to the Federal District Court in Minnesota. No further action has been
taken on this suit at the time of this report.
During the quarter ending March 31, 2001 the Company commenced litigation in the
United States District Court for the Central District of California against a
former employee, Mark B. Pinson, and other unnamed parties alleging that they
violated various terms of a settlement agreement previously entered into by the
Company and Mr. Pinson on July 13, 2000. The settlement agreement provided,
among other things, that Mr. Pinson a) complete various projects for the
Company, b)provide training for the Company, and c) maintain the confidentiality
of the Company's proprietary information. This agreement provides for liquidated
damages of $100,000. The Company has asked the court for an award of liquidated
damages in the amount of $100,000, and for other relief. This legal action is in
its early stages and its ultimate resolution cannot be determined at this date.
See also Disputed Liabilities.
Item 2. Change in Securities.
None.
Item 3. Defaults Upon Senior Securities.
None.
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.
None.
12
Item 6. Exhibits and Reports on Form 8-K
Date of Filing Items Reported Financial Statements Filed
- -------------- -------------- --------------------------
Other Events:
January 30, 2001 Change in Officers None
Refinancing of Secured Note
Other Events:
March 13, 2001 Change in Officers None
Cancellation of Consulting
Agreement
Hiring of Consultant
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
VERITEC INC.
By: /s/ Van Thuy Tran
------------------
Van Thuy Tran
President
Dated May 11, 2001
13