VERITEC,
INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
|
|
Six months ended December 31,
|
|
|
|
2019
|
|
2018
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(184,081
|
)
|
|
$
|
(425,143
|
)
|
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
|
Interest accrued on notes payable
|
|
|
164,458
|
|
|
|
146,546
|
|
|
Stock-based compensation
|
|
|
10,070
|
|
|
|
572
|
|
|
Gain on extinguishment of convertible note payable
|
|
|
(166,921
|
)
|
|
|
—
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(1,145
|
)
|
|
|
(1,696
|
)
|
|
Prepaid expenses
|
|
|
(154
|
)
|
|
|
(63
|
)
|
|
Customer deposits
|
|
|
12,014
|
|
|
|
—
|
|
|
Deferred revenue
|
|
|
—
|
|
|
|
(15,000
|
)
|
|
Accounts payable
|
|
|
(41,569
|
)
|
|
|
46,234
|
|
|
Accounts payable, related party
|
|
|
(4,250
|
)
|
|
|
—
|
|
|
Accrued expense
|
|
|
6,031
|
|
|
|
16,956
|
|
|
Net cash used in operating activities
|
|
|
(205,547
|
)
|
|
|
(231,594
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
|
Proceeds from notes payable - related party
|
|
|
281,543
|
|
|
|
192,590
|
|
|
Net cash provided by financing activities
|
|
|
281,543
|
|
|
|
192,590
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH
|
|
|
75,996
|
|
|
|
(39,004
|
)
|
|
CASH AT BEGINNING OF PERIOD
|
|
|
91,112
|
|
|
|
139,086
|
|
|
CASH AT END OF PERIOD
|
|
$
|
167,108
|
|
|
$
|
100,082
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Cash paid for taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
|
VERITEC,
INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED DECEMBER 31, 2019 AND 2018
(UNAUDITED)
NOTE
1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The
Company
Veritec,
Inc. (Veritec) 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
Veritec
is primarily engaged in the mobile banking and payment processing business.
As
a Cardholder Independent Sales Organization, Veritec can 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 its sponsoring
bank. Veritec has a portfolio of five United States and eight foreign patents. Also, Veritec has seven U.S. and twenty-eight
foreign pending patent applications. Veritec had agreements with various banks in the past and is currently seeking a bank to
sponsor its Prepaid Card programs.
On May 14, 2019, The US Patent Office issued
Veritec, Inc. Patent No. US 10,289,942 B2 titled Combined Event Driver and Financial Card. On July 23, 2019, the US Patent Office
issued Veritec, Inc. Patent No. US 10,360,556 B2 titled Financial Card Transaction Security and Processing Methods. The Company
is seeking to sell a fractional interest in the patents to investors, and to license the use of the patents.
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 December 31, 2019, are not necessarily indicative of the results that
may be expected for the year ending June 30, 2020. The Condensed Consolidated Balance Sheet information as of June 30, 2019, was
derived from the Company’s audited Consolidated Financial Statements as of and for the year ended June 30, 2019, included
in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on
September 30, 2019. 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 period
ended December 31, 2019, the Company incurred a loss from operations of $184,081 and used cash in operating activities of $205,547,
and on December 31, 2019, the Company had a stockholders’ deficit of $5,473,388. In addition, as of December 31, 2019, the
Company is delinquent in payment of $642,511 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, 2019 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 2020 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, assumptions used in valuing stock-based compensation, and the valuation of deferred tax assets.
Revenue
Recognition
Revenues
for the Company are classified into mobile banking technology revenue and management fee revenue.
The
Company recognized revenue in accordance Financial Accounting Standards Board’s (“FASB”) Accounting Standards
Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“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.
Mobile
Banking Technology Revenue
The
Company, as a merchant payment processor and a distributor, recognizes revenue from transaction fees charged to cardholders for
the use of its issued mobile debit cards. The fees are recognized monthly after all cardholder transactions have been summarized
and reconciled with third party processors.
The
Company has entered into certain long-term agreements to provide application development and support. Some customers paid the
agreement in full at signing, and the Company recorded the receipt of payment as deferred revenue. The Company records revenue
relating to these agreements on a pro-rata basis over the term of the agreement and reduces its deferred revenue balance accordingly.
Other
Revenue, Management Fee - Related Party
On
December 31, 2015, the Company sold all of its assets of its Barcode Technology, which was comprised solely of its intellectual
property, to The Matthews Group, a related party (see Note 6). The Company subsequently entered into a management services agreement
with The Matthews Group to manage all facets of the barcode technology operations through June 30, 2020. The Company earns a fee
of 35% of all revenues billed up to June 30, 2020, and recognizes management fee revenue as services are performed.
Fair
Value of Financial Instruments
The
Company determines the fair value of its assets and liabilities based on the exchange price in U.S. dollars that would be received
for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability
in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value
maximize the use of observable inputs and minimize the use of unobservable inputs. The Company uses a fair value hierarchy with
three levels of inputs, of which the first two are considered observable and the last unobservable, to measure fair value:
|
|
•
|
Level 1 —
Quoted prices in active markets for identical assets or liabilities.
|
|
|
•
|
Level 2 —
Inputs, other than Level 1, that are observable, either directly or indirectly, such as quoted prices for similar assets or
liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable
market data for substantially the full term of the assets or liabilities.
|
|
|
•
|
Level 3 —
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets
or liabilities.
|
The
carrying amounts of financial instruments such as cash, accounts receivable, and accounts payable and accrued liabilities, approximate
the related fair values due to the short-term maturities of these instruments.
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 periods ended December 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.
As
of December 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 December 31,
|
|
|
|
2019
|
|
2018
|
|
Series H Preferred Stock
|
|
|
10,000
|
|
|
|
10,000
|
|
|
Convertible Notes Payable
|
|
|
21,048,359
|
|
|
|
20,131,347
|
|
|
Options
|
|
|
3,650,000
|
|
|
|
3,650,000
|
|
|
Total
|
|
|
24,708,359
|
|
|
|
23,791,347
|
|
Concentrations
During
the three and six month period ended December 31, 2019, the Company had one customer, a related party, that represented 62% and
75% of our revenues, respectively. During the three and six month period ended December 31, 2018, the Company had one customer,
a related party that represented 60% and 74% of its revenues, respectively. No other customer represented more than 10% of our
revenues during the period ended December 31, 2019 and 2018.
During
the period ended December 31, 2019, and 2018, all of the Company’s revenues were earned in the United States of America.
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
Stock-Based
Compensation
The
Company issues stock options and warrants, shares of common stock, and equity interests as share-based compensation to employees
and non-employees. The Company accounts for its share-based compensation to employees in accordance with FASB ASC 718, Compensation
– Stock Compensation. Stock-based compensation cost is measured at the grant date, based on the estimated fair value
of the award, and is recognized as expense over the requisite service period.
In
prior periods through June 30, 2019, the Company accounted for share-based compensation issued to non-employees and consultants
in accordance with the provisions of FASB ASC 505-50, Equity - Based Payments to Non-Employees . Measurement of share-based
payment transactions with non-employees is based on the fair value of whichever is more reliably measurable: (a) the goods or
services received; or (b) the equity instruments issued. The final fair value of the share-based payment transaction is determined
at the performance completion date. For interim periods, the fair value is estimated, and the percentage of completion is applied
to that estimate to determine the cumulative expense recorded.
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.
The Company adopted ASU 2018-07 on July 1, 2019, which had no impact on the Company’s financial statements and related disclosures
as the Company does not have leases with terms longer than 12 months.
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 financial statements.
NOTE
2 – CONVERTIBLE NOTES AND NOTES PAYABLE
Convertible
notes and notes payable
Convertible
notes and notes payable includes principal and accrued interest and consists of the following at December 31, 2019 and June 30,
2019:
|
|
|
December 31,
2019
|
|
June 30,
2019
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
(a) Convertible notes ($17,986 and $184,506 in default)
|
|
$
|
58,247
|
|
|
$
|
224,037
|
|
|
(b) Notes payable (in default)
|
|
|
413,901
|
|
|
|
405,162
|
|
|
(c) Notes payable
|
|
|
25,653
|
|
|
|
25,153
|
|
|
Total notes-third parties
|
|
$
|
497,801
|
|
|
$
|
654,352
|
|
(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.
On
June 30, 2019, convertible notes totaled $224,037. During the period ended December 31, 2019, interest of $1,131 was added to
the principal. In addition, the Company and one of the holders of the convertible notes agreed to extinguish a convertible note
payable of $166,921 resulting in a gain on extinguishment (see Note 3), resulting in a balance owed of $58,247 at December 31,
2019. On December 31, 2019, $17,986 of the convertible notes were in default and convertible at a conversion price of $0.30 per
share into 59,952 shares of the Company’s common stock. The balance of $40,261 is due on demand and convertible at a conversion
price of $0.08 per share into 503,267 shares of the Company’s common stock.
(b)
The notes bear interest ranging from 6.5% to 10% per annum, were due in 2012, and are in default.
On
June 30, 2019, the notes totaled $405,162. During the period ended December 31, 2019, interest of $8,739 was added to the principal,
resulting in balance owed of $413,901 on December 31, 2019. On December 31, 2019, $373,118 of notes are secured by the Company’s
intellectual property, and $40,783 of notes are unsecured.
(c)
The notes are unsecured and bear interest of 4% per annum and due on March 17, 2020.
On
June 30, 2019, the notes totaled $25,153. During the period ended December 31, 2019, interest of $500 was added to the principal,
resulting in a balance owed of $25,653 on December 31, 2019.
Convertible
notes and notes payable-related parties
Notes
payable-related parties includes principal and accrued interest and consists of the following at December 31, 2019, and June 30,
2019:
|
|
|
December 31,
2019
|
|
June 30,
2019
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
(a) Convertible notes-The Matthews Group
|
|
$
|
1,506,541
|
|
|
$
|
1,452,621
|
|
|
(b) Notes payable-The Matthews Group
|
|
|
2,289,329
|
|
|
|
1,914,618
|
|
(c) Convertible notes-other related parties ($210,624 and
$206,124 in default)
|
|
|
286,728
|
|
|
|
279,728
|
|
|
Total notes-related parties
|
|
$
|
4,082,598
|
|
|
$
|
3,646,967
|
|
(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 6) and is owned 50% by Ms. Van Tran, the Company’s CEO, and 50% by Larry Johanns,
a significant shareholder of the Company. On June 30, 2019, convertible notes due to The Matthews Group totaled $1,452,621. During
the period ended December 31, 2019, interest of $53,920 was added to the principal resulting in a balance payable of $1,506,541
on December 31, 2019. On December 31, 2019, the notes are convertible at a conversion price of $0.08 per share into 18,831,758
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 6) dated December 31, 2015. On June 30, 2019, notes due to The Matthews Group
totaled $1,914,618. During the period ended December 31, 2019, $281,543 of notes payable were issued, interest of $93,168 was
added to the principal, resulting in a balance owed of $2,289,329 at December 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 $0.08 to $0.30, and bear interest at rates ranging from 8% to 10% per annum.
On
June 30, 2019, convertible notes due to other related parties totaled $279,728. During the period ended December 31, 2019, interest
of $7,000 was added to the principal resulting in a balance owed of $286,728 on December 31, 2019. On December 31, 2019, $210,624
of the notes were due in 2010 and are in default, and the balance of $76,104 is due on demand. At December 31, 2019, $210,624
of the notes are convertible at a conversion price of $0.30 per share into 702,081 shares of the Company’s common stock,
and $76,104 of the notes are convertible at a conversion price of $0.08 per share into 951,300 shares of the Company’s common
stock.
NOTE
3 – GAIN ON EXTINGUISHMENT OF CONVERTIBLE NOTE PAYABLE
In
May 2009, the Company issued a convertible note payable for $100,000. The note was unsecured, convertible into shares of the Company’s
common stock at $0.30 per share, with interest at 8% per annum, and due November 15, 2010. The note was not paid when due and
the Company went into default on the convertible note payable. The Company continued to accrue interest on the unpaid principal
at 8% per annum, and repaid $10,000 principal in 2014.
On
November 13, 2017, the noteholder filed a lawsuit in district court in Hennepin County, Minnesota asserting that the Company breached
the terms of the promissory note. The noteholder sought repayment on the principal of the promissory note, in the amount of $100,000
less the $10,000 which the Company previously paid, plus interest, collection costs, and attorney’s fees. As of June 30,
2019, the Company had recorded a total of $166,921 for the convertible note payable and accrued interest due to the noteholder.
On
July 10, 2019, the Company and the noteholder entered into a Settlement Agreement and Mutual Release. The Company and the noteholder
agreed to generally discharge and forever release each other from future claims, to pay their own legal fees, and the convertible
promissory note payable to the noteholder was discharged. As the Company was legally released from its obligation under the convertible
note, the Company recorded a gain on extinguishment of the convertible note payable of $166,921 during the period ended December
31, 2019.
NOTE
4 - STOCKHOLDERS’ DEFICIENCY
On
December 31, 2019, and June 30, 2019, 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
5 – STOCK OPTIONS
A
summary of stock options as of December 31, 2019, is as follows:
|
|
|
Number of Shares
|
|
Weighted Average Exercise Price
|
|
Outstanding at June 30, 2019
|
|
|
3,650,000
|
|
|
$
|
0.06
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
Forfeited
|
|
|
—
|
|
|
$
|
—
|
|
|
Outstanding at December 31, 2019
|
|
|
3,650,000
|
|
|
$
|
0.06
|
|
|
Exercisable at December 31, 2019
|
|
|
3,650,000
|
|
|
$
|
0.06
|
|
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 was being amortized over the vesting
period of 12 months. During the three and six month period ended December 31, 2019 and 2018, the Company recorded stock-based
compensation expense of $4,790 and $10,070, and $572 and $572, respectively. As of December 31, 2019, the Company had no outstanding
unvested options with future compensation costs. The outstanding and exercisable stock options had an intrinsic value of $23,000
and $17,250, respectively, on December 31, 2019.
Additional
information regarding options outstanding as of December 31, 2019, is as follows:
|
Options
Outstanding at
December
31, 2019
|
|
Options
Exercisable at
December
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
|
|
|
|
4.98
|
|
|
$
|
0.03
|
|
|
|
1,150,000
|
|
|
$
|
0.03
|
|
|
$
|
0.08
|
|
|
|
2,500,000
|
|
|
|
0.11
|
|
|
$
|
0.08
|
|
|
|
2,500,000
|
|
|
$
|
0.08
|
|
|
|
|
|
|
|
3,650,000
|
|
|
|
|
|
|
|
|
|
|
|
3,650,000
|
|
|
|
|
|
NOTE
6 – RELATED PARTY TRANSACTIONS
The
Matthews Group is owned 50% by Ms. 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 2).
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 December 31, 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, 2020. 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 earned a fee of 20% of all revenues up
to May 31, 2017, and 35% of all revenues up to June 30, 2020, from the barcode technology operations. During the three and six
month period ended December 31, 2019 and 2018, the Company recorded management fee revenue related to this agreement of $45,990
and $175,424, and $50,885 and $92,516 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 period ended
December 31, 2019 and 2018, cash flow loans of $281,543 and $192,590, respectively, were made to the Company at 10% interest per
annum and due on demand. On December 31, 2019, cash flow loans of $2,289,329 are due to The Matthews Group (see Note 2).
Advances
from Related Parties
From
time to time, Ms. Tran, the Company’s CEO/Executive Chair, provides advances to finance the Company’s working capital
requirements. As of December 31, 2019, and June 30, 2019, total advances to Ms. Tran amounted to $96,110 and $100,360, respectively,
and have been presented as accounts payable, related party on the accompanying 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, the Company’s CEO/Executive Chair. For the three and six month periods
ended December 31, 2019 and 2018, lease payments to Ms. Tran totaled $12,750 and $25,500, and $12,750 and $25,500, respectively,
and are included in general and administrative expenses.
NOTE
7 – COMMITMENTS AND CONTINGENCIES
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 agreed to return the 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 December 31, 2019, the 500,000 shares have not been relinquished. When the Company receives the shares, it will record
a cancellation of shares.
NOTE
8 – SUBSEQUENT EVENT
On
January 10, 2020, the Company modified the term of a stock option originally granted to its Chief Executive Officer in February
2013 and due to expire in February 2020. The Company extended the expiration date of the stock option by an additional 24 months.
Due to the modification, the Company recorded a charge of approximately $6,000 on the modification date to account for the incremental
change in fair value of the stock option before and after the modification.