VERITEC,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
|
Nine
months ended December 31,
|
|
|
|
2018
|
|
2018
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
Cash Flows from
Operating Activities
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(640,101
|
)
|
|
$
|
4,990
|
|
|
Adjustments to Reconcile Net income (loss) to
Net Cash Used in Operating Activities
|
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
—
|
|
|
|
16,042
|
|
|
Change in the fair value of derivative liability
|
|
|
—
|
|
|
|
(519,582
|
)
|
|
Stock-based compensation expense
|
|
|
5,894
|
|
|
|
—
|
|
|
Interest accrued on notes payable
|
|
|
222,024
|
|
|
|
181,009
|
|
|
Changes in Assets and Liabilities
|
|
|
|
|
|
|
|
|
|
(Increase) Decrease in:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(7,339
|
)
|
|
|
(493
|
)
|
|
Prepaid expenses
|
|
|
(659
|
)
|
|
|
(2,110
|
)
|
|
(Decrease) Increase in:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
96,788
|
|
|
|
(2,780
|
)
|
|
Accrued expense
|
|
|
55,302
|
|
|
|
(14,057
|
)
|
|
Deferred revenues
|
|
|
(22,500
|
)
|
|
|
(34,993
|
)
|
|
Net Cash Used in Operating
Activities
|
|
|
(290,591
|
)
|
|
|
(371,974
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from
Financing Activities
|
|
|
|
|
|
|
|
|
|
Proceeds from note payable
|
|
|
10,000
|
|
|
|
—
|
|
|
Proceeds from notes payable
- related party
|
|
|
253,769
|
|
|
|
359,044
|
|
|
Net Cash Provided by Financing
Activities
|
|
|
263,769
|
|
|
|
359,044
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash
|
|
|
(26,822
|
)
|
|
|
(12,930
|
)
|
|
Cash beginning of period
|
|
|
139,086
|
|
|
|
46,693
|
|
|
Cash end of period
|
|
$
|
112,264
|
|
|
$
|
33,763
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Taxes paid
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
|
VERITEC,
INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE
1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The
Company
Veritec,
Inc. (Veritec) was formed in the State of Nevada on September 8, 1982. Veritec’s wholly owned subsidiaries include Veritec
Financial Systems, Inc., Tangible Payment Systems, Inc., and Public Bell, Inc. (collectively the “Company”).
Nature
of Business
The
Company is currently engaged in the development, marketing, sales and licensing of products and professional services related
to mobile banking prepaid debit cards. As a Cardholder Independent Sales Organization, Veritec is able to promote and sell Visa
branded card programs. As a Third-Party Servicer, Veritec provides back-end cardholder transaction processing services for Visa
branded card programs on behalf of a sponsoring bank. The Company is currently seeking a bank to sponsor its Prepaid Card programs.
The Company has a portfolio of five United States and eight foreign patents. In addition, the Company has seven U.S. and twenty-eight
foreign pending patent applications.
BASIS
OF PRESENTATION
The
accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with United States of America
generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form
10-Q. Accordingly, the Condensed Consolidated Financial Statements do not include all of the information and footnotes required
for complete financial statements.
In
the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the period ended March 31, 2019, are not necessarily indicative of the results that
may be expected for the year ending June 30, 2019. The Condensed Consolidated Balance Sheet information as of June 30, 2018 was
derived from the Company’s audited Consolidated Financial Statements as of and for the year ended June 30, 2018 included
in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on
October 5, 2018. These financial statements should be read in conjunction with that report.
The
accompanying Condensed Consolidated Financial Statements include the accounts of Veritec and its wholly owned subsidiaries, Veritec
Financial Systems, Inc., Tangible Payment Systems, Inc., and Public Bell, Inc. Inter-company transactions and balances were eliminated
in consolidation.
GOING
CONCERN
The
accompanying Condensed Consolidated Financial Statements have been prepared assuming the Company will continue as a going concern,
which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. During the nine
months ended March 31, 2019, the Company incurred a loss from operations of $640,101 and used cash in operating activities of
$290,591, and at March 31, 2019, the Company had a working capital deficit of $4,940,396 and a stockholders’ deficiency
of $5,095,396. In addition, as of March 31, 2019, the Company is delinquent in payment of $787,173 of its notes payable. These
factors, among others, raise substantial doubt about our ability to continue as a going concern within one year of the date that
the financial statements are issued. In addition, the Company’s independent registered public accounting firm, in its report
on our June 30, 2018 financial statements, has raised substantial doubt about the Company’s ability to continue as a going
concern. The Company’s financial statements do not include any adjustments that might be necessary if the Company is unable
to continue as a going concern.
The
Company believes it will require additional funds to continue its operations through fiscal 2019 and to continue to develop its
existing projects and plans to raise such funds by finding additional investors to purchase the Company’s securities, generating
sufficient sales revenue, implementing dramatic cost reductions or any combination thereof. There is no assurance that the Company
can be successful in raising such funds, generating the necessary sales or reducing major costs. Further, if the Company is successful
in raising such funds from sales of equity securities, the terms of these sales may cause significant dilution to existing holders
of common stock. The Condensed Consolidated Financial Statements do not include any adjustments that may result from this uncertainty.
Use
of Estimates
The
preparation of Condensed Consolidated Financial Statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions that may affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements
and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Those
estimates and assumptions include estimates for reserves of uncollectible accounts, analysis of impairments of long lived assets,
accruals for potential liabilities, and assumptions used in valuing derivatives and stock-based compensation, and the valuation
of deferred taxes.
Revenue
Recognition
Prior
to January 1, 2018, the Company recognized its revenue in accordance with the Financial Accounting Standards Board's Accounting
Standards Codification (ASC) 605
Revenue Recognition
, upon the delivery of its services or products when: (1) delivery
had occurred or services rendered; (2) persuasive evidence of an arrangement existed; (3) there are no continuing obligations
to the customer; and (4) the collection of related accounts receivable was probable.
Effective
July 1, 2018 the Company adopted we adopted ASC 606,
Revenue from Contracts with Customers
("ASC 606”) which
superseded previous revenue recognition guidance. The underlying principle of ASC 606 is to recognize revenue to depict the transfer
of goods or services to customers at the amount expected to be collected. ASC 606 creates a five-step model that requires entities
to exercise judgment when considering the terms of contracts, which includes (1) identifying the contracts or agreements with
a customer, (2) identifying the Company’s performance obligations in the contract or agreement, (3) determining the transaction
price, (4) allocating the transaction price to the separate performance obligations, and (5) recognizing revenue as each performance
obligation is satisfied. The Company only applies the five-step model to contracts when it is probable that the Company will collect
the consideration it is entitled to in exchange for the services it transfers to its clients. The Company has concluded that the
new guidance did not require any significant change to its revenue recognition processes and the implementation of ASC 606 did
not have a material impact on the Company’s financial statements.
Fair
Value of Financial Instruments
Fair
value measurements adopted by the Company are based on the authoritative guidance provided by the Financial Accounting Standards
Board (“FASB”) which defines fair value as the price that would be received to sell an asset or paid to transfer a
liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants
at the measurement date. FASB authoritative guidance establishes a fair value hierarchy, which prioritizes the inputs used in
measuring fair value into three broad levels as follows:
Level
1 - Quoted prices in active markets for identical assets or liabilities.
Level
2 - Inputs, other than the quoted prices in active markets that are observable either directly or indirectly.
Level
3 - Unobservable inputs based on the Company's assumptions.
The
carrying amounts reported in the Condensed Consolidated Balance Sheet for cash and cash equivalents, accounts receivable, and
current liabilities, including notes payable and convertible notes, approximate their fair values because of the short period
of time between the origination of such instruments and their expected realization and their current market rates of interest.
Net
Income (Loss) per Common Share
Basic
earnings (loss) per share are computed by dividing the net income (loss) applicable to Common Stockholders by the weighted average
number of shares of Common Stock outstanding during the year. Diluted earnings (loss) per share is computed by dividing the net
income (loss) applicable to Common Stockholders by the weighted average number of common shares outstanding plus the number of
additional common shares that would have been outstanding if all dilutive potential common shares had been issued, using the treasury
stock method. Potential common shares are excluded from the computation as their effect is antidilutive.
For
the period ended March 31, 2019 and 2018, the calculations of basic and diluted loss per share are the same because potential
dilutive securities would have an anti-dilutive effect. At March 31, 2019, the Company’s Series H Preferred Stock, Convertible
Notes Payable and Options were antidilutive because their exercise prices and conversion prices were out of the money.
As
of March 31, 2019 and 2018, we excluded the outstanding securities summarized below, which entitle the holders thereof to acquire
shares of common stock, from our calculation of earnings per share, as their effect would have been anti-dilutive.
|
|
|
As
of March 31,
|
|
|
|
2019
|
|
2018
|
|
Series H Preferred Stock
|
|
|
10,000
|
|
|
|
10,000
|
|
|
Convertible Notes Payable
|
|
|
20,496,700
|
|
|
|
19,017,287
|
|
|
Options
|
|
|
3,650,000
|
|
|
|
2,500,000
|
|
|
Total
|
|
|
24,156,700
|
|
|
|
21,527,287
|
|
Concentrations
During
the nine months ended March 31, 2019, the Company had one customer, a related party, which represented 60% of our revenues, one
customer that represented 20% of our revenues, and one customer that represented 10% of our revenues. During the nine months ended
March 31, 2018, the Company had one customer, a related party that represented 69% of its revenue, and one customer that represented
13% of its revenue. No other customer represented more than 10% of our revenues during the nine months ended March 31, 2019 and
2018.
Segments
The
Company operates in one segment, the mobile financial banking industry. In accordance with the “Segment Reporting”
Topic of the ASC, the Company’s chief operating decision maker has been identified as the Chief Executive Officer and President,
who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. Existing
guidance, which is based on a management approach to segment reporting, establishes requirements to report selected segment information
quarterly and to report annually entity-wide disclosures about products and services, major customers, and the countries in which
the entity holds material assets and reports revenue. All material operating units qualify for aggregation under “Segment
Reporting” due to their similar customer base and similarities in: economic characteristics; nature of products and services;
and procurement, manufacturing and distribution processes. Since the Company operates in one segment, all financial information
required by “Segment Reporting” can be found in the accompanying consolidated financial statements
Recent
Accounting Pronouncements
In
February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-02,
Leases
, which was subsequently amended in 2018 by ASU 2018-10, ASU 2018-11 and ASU 2018-20 (collectively, Topic 842). Topic 842
will require the recognition of a right-of-use asset and a corresponding lease liability, initially measured at the present value
of the lease payments, for all leases with terms longer than 12 months. For operating leases, the asset and liability will be
expensed over the lease term on a straight-line basis, with all cash flows included in the operating section of the statement
of cash flows. For finance leases, interest on the lease liability will be recognized separately from the amortization of the
right-of-use asset in the statement of comprehensive income and the repayment of the principal portion of the lease liability
will be classified as a financing activity while the interest component will be included in the operating section of the statement
of cash flows. Topic 842 is effective for annual and interim reporting periods beginning after December 15, 2018. Early adoption
is permitted. Upon adoption, leases will be recognized and measured at the beginning of the earliest period presented using a
modified retrospective approach. Topic 842 allows for a cumulative-effect adjustment in the period the new lease standard is adopted
and will not require restatement of prior periods. The Company is in the process of evaluating the impact of Topic 842 on the
Company’s financial statements and disclosures, though the adoption is expected to result in an increase in the assets and
liabilities reflected on the Company’s balance sheets.
Other
recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified
Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact
on the Company’s present or future consolidated financial statements.
NOTE
2 – CONVERTIBLE NOTES AND NOTES PAYABLE
Convertible
notes and notes payable-in default
Convertible
notes and notes payable includes principal and accrued interest and consists of the following at March 31, 2019 and June 30, 2018:
|
|
|
|
March 31,
2019
|
|
June 30,
2018
|
|
(a)
|
Convertible notes (includes $182,506 of convertible
notes in default)
|
|
$
|
221,672
|
|
|
$
|
214,576
|
|
|
(b)
|
Notes payable-in default
|
|
|
400,793
|
|
|
|
387,684
|
|
|
(c)
|
Notes payable
|
|
|
10,014
|
|
|
|
—
|
|
|
|
Total notes-third parties
|
|
$
|
632,479
|
|
|
$
|
602,260
|
|
(a)
The notes are unsecured, convertible into common stock at amounts ranging from $0.08 to $0.30 per share, bear interest at rates
ranging from 5% to 8% per annum, were due through 2011 and are in default or due on demand.
At
June 30, 2018, convertible notes totaled $214,576. During the nine months ended March 31, 2019, interest of $7,096 was added to
principal leaving a balance owed of $221,672 at March 31, 2019. At March 31, 2019, $182,506 of the convertible notes were in default,
and convertible at a conversion price of $0.30 per share into 608,354 shares of the Company’s common stock. Certain of the
amounts due are subject to a legal proceeding (see Note 6). The balance of $39,166 is due on demand and convertible at a conversion
price of $0.08 per share into 489,572 shares of the Company’s common stock.
(b)
The notes are either secured by the Company’s intellectual property or unsecured and bear interest ranging from 6.5% to
10% per annum, were due in 2012, and are in default.
At June 30,
2018, the notes totaled $387,684. During the nine months ended March 31, 2019, interest of $13,109 was added to principal leaving
a balance owed of $400,793 at March 31, 2019, which are in default. At March 31, 2019, $361,509 of notes are secured by the Company’s
intellectual property and $39,284 of notes are unsecured.
(c)
The note is dated March 18, 2019 and is unsecured, bears interest at 4.0% per annum, and is due on March 17, 2020.
On
March 18, 2019, the Company issued an unsecured note payable for $10,000. From the date of issuance to March 31, 2019, interest
of $14 was added to principal leaving a balance owed of $10,014 at March 31, 2019.
Convertible
notes and notes payable-related party
Notes
payable-related party includes principal and accrued interest and consists of the following at March 31, 2019 and June 30, 2018:
|
|
|
|
March 31,
2019
|
|
June 30,
2018
|
|
(a)
|
Convertible notes-The Matthews Group
|
|
$
|
1,425,661
|
|
|
$
|
1,344,782
|
|
|
(b)
|
Notes payable-The Matthews Group
|
|
|
1,748,283
|
|
|
|
1,384,088
|
|
|
(c)
|
Convertible notes-other related-in default
|
|
|
276,229
|
|
|
|
265,729
|
|
|
|
Total notes-related party
|
|
$
|
3,450,173
|
|
|
$
|
2,994,599
|
|
(a)
The notes are unsecured, convertible into common stock at $0.08 per share, bear interest at rates ranging from 8% to 10% per annum,
and are due on demand.
The
Matthews Group is a related party (see Note 5) and is owned 50% by Ms. Van Tran, the Company’s CEO, and 50% by Larry Johanns,
a significant shareholder of the Company. At June 30, 2018, convertible notes due to The Matthews Group totaled $1,344,782. During
the nine months ended March 31, 2019, interest of $80,879 was added to principal leaving a balance owed of $1,425,661 at March
31, 2019. At March 31, 2019, the notes are convertible at a conversion price of $0.08 per share into 17,820,768 shares of the
Company’s common stock.
(b)
The notes are unsecured, accrue interest at 10% per annum, and are due on demand. The notes were issued relating to a management
services agreement with The Matthews Group (see Note 5) dated December 31, 2015. At June 30, 2018, notes due to The Matthews Group
totaled $1,384,088. During the nine months ended March 31, 2019, $253,769 of notes payable were issued, interest of $110,426 was
added to principal, leaving a balance owed of $1,748,283 at March 31, 2019.
(c)
The notes are due to a current and a former director, are unsecured, convertible into common stock at per share amounts ranging
from $0.10 to $0.30, and bear interest at rates ranging from 8% to 10% per annum.
At
June 30, 2018, convertible notes due other related parties totaled $265,729. During the nine months ended March 31, 2019, interest
of $10,500 was added to principal leaving a balance owed of $276,229 at March 31, 2019. At March 31, 2019, $203,874 of the notes
were due in 2010 and are in default, and the balance of $72,355 is due on demand. At March 31, 2019, $203,874 of the notes are
convertible at a conversion price of $0.30 per share into 679,581 shares of the Company’s common stock, $21,706 of the notes
are convertible at a conversion price of $0.10 per share into 217,062 shares of the Company’s common stock, and $50,649
of the notes are convertible at a conversion price of $0.08 per share into 633,098 shares of the Company’s common stock.
NOTE
3 - STOCKHOLDERS’ DEFICIENCY
At
March 31, 2019 and June 30, 2018, 145,000 shares of common stock to be issued with an aggregate value of $12,500 have not been
issued and are reflected as common stock to be issued in the accompanying Condensed Consolidated Financial Statements.
NOTE
4 – STOCK OPTIONS
A
summary of stock options as of March 31, 2019 is as follows:
|
|
|
Number of Shares
|
|
Weighted - Average
Exercise Price
|
|
Outstanding at June 30, 2018
|
|
|
2,500,000
|
|
|
$
|
0.08
|
|
|
Granted
|
|
|
1,150,000
|
|
|
|
0.03
|
|
|
Forfeited
|
|
|
—
|
|
|
$
|
—
|
|
|
Outstanding at March 31, 2019
|
|
|
3,650,000
|
|
|
$
|
0.06
|
|
|
Exercisable at March
31, 2019
|
|
|
2,787,500
|
|
|
$
|
0.07
|
|
In
December 2018, the Company granted to its directors and employees, stock options to purchase an aggregate of 1,150,000 shares
of Common Stock. The fair value of the stock options granted was determined to be $21,285, and is being amortized over the vesting
period of 12 months. The fair value of the stock options was calculated using the Black-Scholes option pricing model using the
following assumptions – stock price of $0.03; exercise price of $0.03; expected life of 2 years; volatility of 121%; dividend
rate of 0.0% and discount rate of 2.63%.
The
Company recorded compensation expense pursuant to authoritative guidance provided by the ASC Topic 718 –
Stock Compensation
for the nine months ended March 31, 2019 of $5,894. No similar expense was recorded during the same prior year period. As
of March 31, 2019, the Company has outstanding unvested options with future compensation costs of $15,391, which will be recorded
as compensation cost as the options vest over their remaining average vesting period of nine months.
The
outstanding and exercisable stock options had an intrinsic value of $34,500 and $8,625, respectively, at March 31, 2019.
Additional
information regarding options outstanding as of March 31, 2019 is as follows:
Options Outstanding
at
March 31, 2019
|
|
Options Exercisable
at
March 31, 2019
|
|
Range of Exercise
|
|
Number of Shares
Outstanding
|
|
Weighted Average
Remaining Contractual Life (Years)
|
|
Weighted Average
Exercise Price
|
|
Number of Shares
Exercisable
|
|
Weighted Average
Exercise Price
|
|
$
|
0.03
|
|
|
|
1,150,000
|
|
|
|
5.73
|
|
|
$
|
0.03
|
|
|
|
287,500
|
|
|
$
|
0.03
|
|
|
$
|
0.08
|
|
|
|
2,500,000
|
|
|
|
0.86
|
|
|
$
|
0.08
|
|
|
|
2,500,000
|
|
|
$
|
0.08
|
|
|
|
|
|
|
|
3,650,000
|
|
|
|
|
|
|
|
|
|
|
|
2,787,500
|
|
|
|
|
|
The
weighted-average remaining contractual life of stock options outstanding and exercisable at March 31, 2019 is 1.58 years.
NOTE
5 – RELATED PARTY TRANSACTIONS
The
Matthews Group is owned 50% by Ms. Van Tran, the Company’s CEO/Executive Chair and a director, and 50% by Larry Johanns,
a significant stockholder of the Company. The Company has relied on The Matthews Group for funding (see Note 4).
Management
Services Agreement and Related Notes Payable with Related Party
The
Company’s Barcode Technology was invented by the founders of Veritec as a product identification system for identification
and tracking of parts, components and products mostly in the liquid crystal display (LCD) markets and for secure identification
documents, financial cards, medical records and other high security applications. On September 30, 2015, the Company sold all
of its assets of its Barcode Technology comprised solely of its intellectual property to The Matthews Group. The Company then
entered into a management services agreement with The Matthews Group to manage all facets of the barcode technology operations,
on behalf of The Matthews Group, through June 30, 2019. The Matthews Group bears the risk of loss from the barcode operations
and has the right to the residual benefits of the barcode operations.
In
consideration of the services provided by the Company to The Matthews Group, the Company earns a fee of 20% of all revenues up
to May 31, 2017, and 35% of all revenues from June 1, 2017 to June 30, 2019, from the barcode technology operations. During the
three and nine months ended March 31, 2019 and 2018, the Company recorded management fee revenue related to this agreement of
$44,536 and $35,034, respectively and $137,052 and $208,527, respectively.
Additionally,
pursuant to the management services agreement, all cash flow (all revenues collected less direct costs paid) of the barcode technology
operations is retained by the Company as proceeds from unsecured notes payable due The Matthews Group. During the nine months
ended March 31, 2019 and 2018, cash flow loans of $253,769 and $359,044, respectively, were made to the Company at 10% interest
per annum and due on demand. At March 31, 2019, cash flow loans of $1,748,283 are due to The Matthews Group (see Note 2).
Advances
from Related Parties
From
time to time, Ms. Van Tran provides advances to finance the Company’s working capital requirements. As of March 31, 2019
and June 30, 2018, total advances to Ms. Van Tran amounted to $96,110, and have been presented as accounts payable, related party
on the accompanying Condensed Consolidated Balance Sheets. The advances are unsecured, non-interest bearing, and due on demand.
Other
Transactions with Related Parties
The
Company leases its office facilities from Ms. Tran. For the nine months ended March 31, 2019 and 2018, rental payments to Ms.
Van Tran totaled $38,250 and $38,250, respectively.
NOTE
6 – LEGAL PROCEEDINGS
On
or about November 13, 2017, David A. Badhwa and Denise a Badhwa (collectively “Plaintiffs”) filed a lawsuit in district
court in Hennepin County, Minnesota asserting that the Company breached the terms of a promissory note. Plaintiffs seek repayment
on the principal of the promissory note, in the amount of $100,000, $10,000 of which Plaintiffs contend Veritec previously paid,
plus interest, collection costs and attorney’s fees. As of May 15, 2018, the date of the last communication on the amount
of recovery that Plaintiffs seek, Plaintiffs sought an award or settlement in the amount of $162,990. If Plaintiffs prevail on
their claims, the Court could award Plaintiffs the unpaid principal in the amount of $90,000, plus interest at the rate of eight
percent (8%) per annum on the unpaid balance, as well as attorney’s fees incurred by Plaintiffs in seeking payment on the
promissory note in an amount determined by the Court. An award of attorney’s fees could be significant. Veritec has vigorously
defended Plaintiffs claims and has asserted a variety of counterclaims against Plaintiffs. Veritec has also attempted to engage
Plaintiffs in settlement discussions, but Plaintiffs have not engaged in meaningful negotiations to resolve the claims in dispute.
Management has recorded a liability related to this proceeding that it feels is adequate.
On
September 21, 2016, the Company entered into a settlement agreement with an individual who was a former officer of the Company.
The individual in prior years was also issued 500,000 shares of common stock for services. The Company alleged that the
individual used the Company's intellectual property without approval. Under the terms of the settlement agreement, the
individual agreed to relinquish a convertible note payable and unpaid interest aggregating $364,686, and return 500,000 shares
of common stock previously issued to him. In turn, the Company agreed to release and discharge the individual against all
claims arising on or prior to the date of the settlement agreement. As of March 31, 2019, the 500,000 shares have not been
relinquished. When the Company receives the shares, it will record a cancellation of shares.