0001471242-12-000791.txt : 20120522 0001471242-12-000791.hdr.sgml : 20120522 20120522143623 ACCESSION NUMBER: 0001471242-12-000791 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20120331 FILED AS OF DATE: 20120522 DATE AS OF CHANGE: 20120522 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VERITEC INC CENTRAL INDEX KEY: 0000773318 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRONIC COMPONENTS, NEC [3679] IRS NUMBER: 953954373 STATE OF INCORPORATION: NV FISCAL YEAR END: 0607 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-15113 FILM NUMBER: 12861348 BUSINESS ADDRESS: STREET 1: 1163 KURSE ST CITY: WEST ST PAUL STATE: MN ZIP: 55118 BUSINESS PHONE: 6515529215 MAIL ADDRESS: STREET 1: 1163 KURSE ST CITY: WEST ST PAUL STATE: MN ZIP: 55118 10-Q 1 vrtc10q0517.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM l0-Q

(Mark One)

[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

for the quarterly period ended MARCH 31, 2012

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE AC T OF 1934

for the transition period from ________________ to ___________________.

Commission File Number. 0-15113

VERITEC, INC.

(Exact name of Registrant as Specified in its Charter)

Nevada	95-3954373
(State or Other Jurisdiction of Incorporation or Organization)	(IRS Employer Identification No.)

2445 Winnetka Avenue N. Golden Valley, MN	55427
(Address of principal executive offices)	(Zip Code)

Registrant's telephone number, including area code: (763) 253-2670

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [ X ] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule l2b-2 of the Exchange Act. (Check one):

Large Accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ ] Smaller reporting company [ X ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [ ] No [ X ]

As of March 31, 2012, there were 15,920,088 shares of the issuer’s common stock outstanding.

VERITEC, INC.

FORM 10-Q

FOR THE FISCAL QUARTER ENDED March 31, 2012

TABLE OF CONTENTS

Page No.

PART I FINANCIAL INFORMATION			4
	ITEM 1	CONDENSED FINANCIAL STATEMENTS	4
	ITEM 2	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
		AND RESULTS OF OPERATIONS	14
	ITEM 3	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
		MARKET RISK	17
	ITEM 4	CONTROLS AND PROCEDURES	17

PART II OTHER INFORMATION			18
	ITEM 1	LEGAL PROCEEDINGS	18
	ITEM 1A	RISK FACTORS	18
	ITEM 2	UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS	18
	ITEM 3	DEFAULTS UPON SENIOR SECURITIES	18
	ITEM 4	MINE SAFETY DISCLOSURES	18
	ITEM 5	OTHER INFORMATION	18
	ITEM 6	EXHIBITS	18
	SIGNATURES		19

Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q, including "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 2 of Part I of this report include forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by forward-looking statements.

In some cases, you can identify forward-looking statements by terminology such as "may," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "proposed," "intended," or "continue" or the negative of these terms or other comparable terminology. You should read statements that contain these words carefully, because they discuss our expectations about our future operating results or our future financial condition or state other "forward-looking" information. There may be events in the future that we are not able to accurately predict or control. Before you invest in our securities, you should be aware that the occurrence of any of the events described in this Quarterly Report could substantially harm our business, results of operations and financial condition, and that upon the occurrence of any of these events, the trading price of our securities could decline and you could lose all or part of your investment. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, growth rates, levels of activity, performance or achievements. We are under no duty to update any of the forward-looking statements after the date of this Quarterly Report to conform these statements to actual results.

PART I

ITEM 1 FINANCIAL STATEMENTS

VERITEC, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31,			June 30,
	2012			2011
ASSETS	(Unaudited)

Current Assets:
Cash	$	57,224		$	14,996
Restricted cash		500,000			—
Accounts receivable, net of allowance of $8,400		21,645			29,135
Note receivable		10,168			—
Inventories		5,163			6,132
Prepaid expenses		4,350			23,281
Employee advances		1,337			2,837
Total Current Assets		599,887			76,381

Property and Equipment, net of accumulated depreciation of $218,916 and $230,784, respectively		4,600			16,468
Total Assets	$	604,487		$	92,849

LIABILITIES AND STOCKHOLDERS’ DEFICIT

Current Liabilities:
Notes payable, net of discount of $102,224 and $0, respectively	$	521,064		$	152,767
Notes payable, related party		2,229,873			2,087,894
Accounts payable		811,684			787,799
Deferred revenue		456,205			71,542
Payroll tax liabilities		474,781			340,628
Accrued expenses		134,325			219,028
Total Current Liabilities		4,627,932			3,659,658

Commitments and Contingencies

Stockholders’ Deficit:
Convertible preferred stock, par value $1.00; authorized 10,000,000 shares, 276,000 shares of Series H authorized, 1,000 shares issued and outstanding		1,000			1,000
Common stock, par value $.01; authorized 50,000,000 shares, 15,920,088 shares issued and outstanding		159,201			159,201
Additional paid-in capital		14,413,010			14,283,077
Accumulated deficit		(18,596,656	)		(18,010,087	)
Total Stockholders’ Deficit		(4,023,445	)		(3,566,809	)

Total Liabilities and Stockholders’ Deficit	$	604,487		$	92,849

See notes to condensed consolidated financial statements

VERITEC, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three months ended March 31,
	2012			2011

License and other revenue	$	184,358		$	212,851
Cost of Sales		74,298			83,714
Gross Profit		110,060			129,137

Operating Expenses:
Selling, general and administrative		203,431			274,596
Research and development		55,896			38,896
Total Operating Expenses		259,327			313,492

Loss from Operations		(149,267	)		(184,355	)

Other Income(Expense):
Interest income		106			—
Interest expense, including $37,324 and $36,192, respectively, to related parties		(71,728	)		(39,041	)
Total Other Income(Expense)		(71,622	)		(39,041	)

Net Loss	$	(220,889	)	$	(223,396	)

Loss Per Common Share,
Basic and Diluted	$	(0.01	)	$	(0.01	)

Weighted Average Number of Shares Outstanding,
Basic and Diluted			15,920,088				15,920,088

See notes to condensed consolidated financial statements

VERITEC, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Nine months ended March 31,
	2012			2011

License and other revenue	$	452,416		$	678,919
Cost of Sales		188,415			260,468
Gross Profit		264,001			418,451

Operating Expenses:
Selling, general and administrative		535,320			883,033
Research and development		162,686			183,720
Total Operating Expenses		698,006			1,066,753

Loss from Operations		(434,005	)		(648,302	)

Other Income(Expense):
Interest income		110			—
Interest expense, including $112,480 and $108,135, respectively, to related parties		(152,674	)		(120,606	)
Total Other Income(Expense)		(152,564	)		(120,606	)

Net Loss	$	(586,569	)	$	(768,908	)

Loss Per Common Share,
Basic and Diluted	$	(0.04	)	$	(0.05	)

Weighted Average Number of Shares Outstanding,
Basic and Diluted			15,920,088				15,920,088

See notes to condensed consolidated financial statements

VERITEC, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT

For the Nine Months Ended March 31, 2012

(Unaudited)

`					Additional
	Preferred Stock		Common Stock		Paid-in	Accumulated
	Shares	Amount	Shares	Amount	Capital	Deficit	Total
Balance, July 1, 2011	1,000	$ 1,000	15,920,088	$159,201	$14,283,077	$(18,010,087)	$(3,566,809)
Fair Value of Shareholder Guarantee of Notes Payable	-	-	-	-	129,931	-	129,931
Stock Based Compensation	-	-	-	-	2	-	2
Net Loss for the Period	-	-	-	-	-	(586,569)	(586,569)
Balance, March 31, 2012	1,000	$ 1,000	15,920,088	$159,201	$14,413,010	$(18,596,656)	$(4,023,445)

See notes to condensed consolidated financial statements

VERITEC, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine months ended March 31,
	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(586,569	)	$	(768,908	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation		11,868			21,458
Amortization of discount on notes payable		27,707			7,312
Fair value of stock options issued to employees		2			1,208
Allowance on note receivable		—			60,000

Changes in operating assets and liabilities:
Accounts receivable		7,490			50,732
Restricted cash		(500,000	)		—
Inventories		969			(2,923	)
Employee advances		1,500			2,000
Prepaid expenses		18,931			(125	)
Deferred revenue		384,663			59,419
Payroll tax liabilities		134,153			145,403
Accounts payables and accrued expenses		(60,818	)		229,004
Interest accrued on notes payable		123,000			116,244

Net cash used in operating activities		(437,104	)		(79,176	)

CASH FLOWS FROM INVESTING ACTIVITIES
Issuance of note receivable		(10,168	)		(60,000	)
Net cash used by investing activities		(10,168	)		(60,000	)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable		489,500			129,200
Net cash provided by financing activities		489,500			129,200

NET INCREASE IN CASH		42,228			(9,976	)
CASH AT BEGINNING OF PERIOD		14,996			31,915
CASH AT END OF PERIOD	$	57,224		$	21,939

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest	$	1,967		$	606

NONCASH INVESTING AND FINANCING ACTIVITIES Fair value of shareholder guarantee on notes payable recorded as a valuation discount.		129,931			—

See notes to condensed consolidated financial statements

VERITEC, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Nine Months Ended March 31, 2012 and 2011 (Unaudited)

A. NATURE OF BUSINESS

References to the “Company” in this Form 10-Q refer to Veritec, Inc. (“Veritec”) and its wholly owned subsidiaries VCode Holdings, Inc. (“VCode”) and Veritec Financial Systems, Inc. (“VTFS”).

The Company is primarily engaged in the development, marketing, sales and licensing of products and rendering of professional services related thereto in the following two fields of technology: (1) proprietary two-dimensional matrix symbology (also commonly referred to as “two-dimensional barcodes” or “2D barcodes”) and (2) mobile banking solutions.

The Company’s two-dimensional matrix symbology technology will hereafter be referred to as the Company’s “Barcode Technology”, and the Company’s mobile banking technology will hereafter be referred to as its “Mobile Banking Technology”.

The Company’s Barcode Technology was originally invented by the founders of Veritec under United States patents 4,924,078, 5,331,176, 5,612,524 and 7,159,780. Our principal licensed product to date that contains our VeriCode^® Barcode Technology has been a product identification system for identification and tracking of manufactured parts, components and products. The VeriCode® symbol is a two-dimensional high data density machine-readable symbol that can contain up to approximately 500 bytes of data.

The Company’s VSCode^® Barcode Technology is a derivative of the VeriCode^® symbol with the ability to encrypt a greater amount of data by increasing data density. The VSCode^® is a data storage “container” that offers a high degree of security and which can also be tailored to the application requirements of the user. The VSCode^® symbol can hold any form of binary information that can be digitized, including numbers, letters, images, photos, graphics, and the minutia for biometric information, including fingerprints and facial image data, to the extent of its data storage capacity, that are likewise limited by the resolution of the marking and reading devices employed by the user. VSCode^® is ideal for secure identification documents (such as national identification cards, driver’s licenses, and voter registration cards), financial cards, medical records and other high security applications.

In its PhoneCodes™ product platform, Veritec developed software to send, store, display, and read a VeriCode^® Barcode Technology symbol on the LCD screen of a mobile phone. With the electronic media that provide the ease of transferring information over the web, Veritec’s PhoneCodes™ technology enables individuals and companies to receive or distribute gift certificates, tickets, coupons, receipts, or engage in banking transactions using the VeriCode^® technology via wireless phone or PDA.

On January 12, 2009, Veritec formed VTFS, a Delaware corporation, to bring its Mobile Banking Technology, products and related professional services to market. In May 2009 Veritec was registered by Security First Bank in Visa’s Third Party Registration Program as a Cardholder Independent Sales Organization and Third-Party Servicer. As a Cardholder Independent Sales Organization, Veritec was able to promote and sell Visa branded card programs. As a Third-Party Servicer, Veritec provided back-end cardholder transaction processing services for Visa branded card programs on behalf of Security First Bank. As of October 2010 the Company’s registration with Security First Bank terminated. As of April 2011 the Company signed an ISO and processor agreement with Palm Desert National Bank (which was later assigned to First California Bank) to market and process the Company’s Visa branded card program on behalf of the bank.

Our VeriSuite™ card enrollment system was released in July 2009. The VeriSuite™ system is a user friendly and cost effective solution that gives governments and businesses the ability to provide cardholders with an identity card containing Veritec’s VSCode® Barcode Technology. The VeriSuite™ system provides secure Bio-ID Cards such as citizen identification, employee cards, health benefit cards, border control cards, financial cards and more.

The Company has a portfolio of five United States and eight foreign patents. In addition, we have seven U.S. and twenty-eight foreign pending patent applications.

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-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 three and nine month periods ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending June 30, 2012. The Condensed Consolidated Balance Sheet as of June 30, 2011 was derived from the audited consolidated financial statements as of such date, but does not include all of the information and footnotes required by GAAP. For further information, refer to the Consolidated Financial Statements and footnotes thereto included in our Form 10-K as of and for the year ended June 30, 2011.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the 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, accruals for potential liabilities and assumptions made in valuing stock instruments issued for services.

The accompanying condensed consolidated financial statements include the accounts of Veritec, VCode, and VTFS. All inter-company transactions and balances were eliminated in consolidation.

C. GOING CONCERN

The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. During the nine months ended March 31, 2012, the Company had a net loss of $586,569. At March 31, 2012, the Company had a working capital deficit of $4,028,045 and a stockholders’ deficiency of $4,023,445. The Company is delinquent or in default of $2,390,778 of its notes payable and is delinquent in payment of certain amounts due of $474,781 for payroll taxes and accrued interest and penalties as of March 31, 2012. The Company believes its cash and forecasted cash flow from operations will not be sufficient to continue operations through fiscal 2012 without continued external investment. The Company will require additional funds to continue its operations through fiscal 2012 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 will 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.

D. SIGNIFICANT ACCOUNTING POLICIES

Net Loss per Common Share:

Basic earnings (loss) per share is 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 anti dilutive.

For the three and nine months ended March 31, 2012 and 2011 the calculations of basic and diluted loss per share are the same because potential dilutive securities would have an anti-dilutive effect.

There were 7,141,067 and 6,547,987 potentially dilutive securities as of March 31, 2012 and 2011, respectively.

Concentrations

During the three months ended March 31, 2012 and 2011, the Company had one customer that accounted for approximately 15% of sales in 2012, and four customers of which two customers accounted for approximately 13% each with the remaining two accounting for approximately 15% and 38% of sales in 2011, respectively. During the nine months ended March 31, 2012 and

2011, the Company had two customers that accounted for approximately 11% and 24% of sales in 2012, and four customers that accounted for approximately 12%, 13%, 16%, and 29% of sales in 2011, respectively. No other customers accounted for more than 10% of sales in either period. As of March 31, 2012 and June 30, 2011, the Company had approximately $14,025 (46%) and $6,050 (20%) and $4,125 (14%) and $6,050 (16%), $10,963 (29%), $10,025 (27%), and $5,300 (14%), respectively, of accounts receivable from its major customers.

For the three months ended March 31, 2012 and 2011, foreign revenues accounted for 30% (22% Korea and 8% Taiwan) and 87% (72% Korea and 15% Taiwan) of the Company’s total revenues respectively. For the nine months ended March 31, 2012 and 2011, foreign revenues accounted for 47% (40% Korea and 7% Taiwan) and 93% (72% Korea, 19% Taiwan, and 2% others) of the Company’s revenues respectively.

Recent Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”. ASU No. 2011-4 does not require additional fair value measurements and is not intended to establish valuation standards or affect valuation practices outside of financial reporting. The ASU is effective for interim and annual periods beginning after December 15, 2011. The Company will adopt the ASU as required. The ASU will affect the Company’s fair value disclosures, but will not affect the Company’s results of operations, financial condition or liquidity.

In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income”. The ASU eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders’ equity, and instead requires consecutive presentation of the statement of net income and other comprehensive income either in a continuous statement of comprehensive income or in two separate but consecutive statements. ASU No. 2011-5 is effective for interim and annual periods beginning after December 15, 2011. The Company will adopt the ASU as required. It will have no affect on the Company’s results of operations, financial condition or liquidity.

In September 2011, the FASB issued ASU 2011-08, “Testing Goodwill for Impairment”, an update to existing guidance on the assessment of goodwill impairment. This update simplifies the assessment of goodwill for impairment by allowing companies to consider qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount before performing the two step impairment review process. It also amends the examples of events or circumstances that would be considered in a goodwill impairment evaluation. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The Company is currently evaluating the affects adoption of ASU 2011-08 may have on its goodwill impairment testing.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the Securities Exchange Commission (the "SEC") did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements.

E. RESTRICTED CASH

The Company entered into a Store Value Prepaid Card Sponsorship Agreement (the “Agreement”) with a Bank. Whereas the Company has developed for marketing and management purposes, store value prepaid card programs (the “Programs”) which will be marketed and managed daily at the direction of the Bank. In connection with the agreement with the Bank, the Company established a Reserve Account controlled by the bank in the amount of $500,000. Since this amount is restricted for the purposes related to the Programs, it is classified as restricted cash on the condensed consolidated balance sheets.

F. NOTES PAYABLE

Notes payable consist of the following:

	March 31, 2012			June 30, 2011
	(UNAUDITED)
Convertible notes payable (includes $122,926 and $116,899, respectively, to non-related parties), unsecured, interest at 8%, due September 2010 through November 2010. The principal and accrued interest are convertible at a conversion price of $0.30. The principal and interest is due immediately on the event of default or change of control. The holders also received warrants to purchase one share of common stock for every $2 of investment. The Company recorded a $20,981 discount on the notes payable for the value of the warrants issued. The discount was fully amortized over the term of the notes payable. There was no unamortized discount as of March 31, 2012 and June 30, 2011, respectively. The notes are now in default.	$	684,845		$	651,629

Convertible notes payable to related parties, unsecured, principal and interest are convertible into common stock at $0.08 to $0.33 per share, interest at 8 % to 10%, due July to November 2010. The notes are now in default.		840,463			766,914

Convertible note payable to related party, secured by the Company’s intellectual property, principal and interest are convertible into common stock at $0.25 per share subject to board of directors’ approval, interest at 8%. The note was due November 2010 and is now in default.		238,882			226,828

Note payable to related party, secured by the Company’s intellectual property, interest at 8% due August 2010 and is now is default.		464,174			441,014

Notes payable to related parties, unsecured, interest at 0% to 8%, due on demand.		124,436			118,408

Note payable, unsecured, interest at 10%, due January 2010 and is now in default.		24,669			23,162

Convertible note payable, unsecured, principal and interest are convertible into common stock at $0.30 per share subject to board of directors’ approval, interest at 8%, due January 2011 and is now in default.		11,786			11,183

Notes payable, unsecured, interest at 5%, due January 2013.(1)		452,349			—

Convertible note payable, unsecured, principal and interest are convertible into common stock at $0.40 per share, interest at 5%, due March 2013.		10,034			—

Convertible note payable, unsecured, principal and interest are convertible into common stock at $1.00 per share subject to board of directors’ approval, interest at 8% due November 2009 and is now in default.		1,523			1,523

Total		2,853,161			2,240,661

Less valuation discount on note payable		(102,224	)		—

Grand total	$	2,750,937		$	2,240,661

(1) In connection with the issuance of the notes payable, two stockholders of the Company granted the lender the option to acquire 1,600,000 unrestricted shares of the Company’s common stock from the stockholder’s at a price of $0.40 per share. The agreement to provide the lender with the option to purchase shares of the two shareholders was presumed to be a separate arrangement between the Company and the lender. As such, the Company valued the shares as if they had provided the lender an option to acquire these shares. The aggregate value of the 1,600,000 shares was valued at $129,931 using Black-Scholes option valuation model. The value of the option is being considered as a valuation discount and will be amortized over the one year life of the Note. For the period ended March 31, 2012, the Company recognized $27,707 of expense related to the amortization of this discount and is included in the interest expense in the condensed consolidated statement of operations. The remaining valuation discount on note payable of $102,224 at March 31, 2012 is reflected as a valuation discount and offset to notes payable in the condensed consolidated balance sheets.

For the purposes of Balance Sheet presentation notes payable have been grouped as follows:

	March 31,	June 30,
	2012	2011
Notes payable, net of discount of $102,224 and $0, respectively	$ 521,064	$ 152,767
Notes payable, related party	2,229,873	2,087,894
	$ 2,750,937	$ 2,240,661

F. STOCK-BASED COMPENSATION

Stock options

The Company has agreements with certain of its employees and independent contractor consultants that provide grants of options to purchase the Company’s common stock.

A summary of stock options as of March 31, 2012 is as follows:

	Number of	Weighted - Average
	Shares	Exercise Price

Outstanding at June 30, 2011	824,249		$0.47
Expired	(40,000)		$0.25
Outstanding at March 31, 2012	784,249		$0.48
Exercisable at March 31, 2012	784,249		$0.48

The weighted-average remaining contractual life of stock options outstanding and exercisable at March 31, 2012 is 2.2 years. The aggregate intrinsic value of stock options outstanding as of March 31, 2012 was $1,800.

The weighted-average fair value of options granted for the nine months ended March 31, 2012 and 2011 was $0.00 and $0.14, respectively.

Stock-based compensation expense was $0 and $338 during the three months ended March 31, 2012 and 2011, respectively. Stock based compensation expense was $2 and $1,208 during the nine months ended March 31, 2012 and 2011, respectively. As of March 31, 2012, there was no unrecognized compensation costs related to stock options.

Warrants

In connection with the issuance of certain convertible notes payable, the Company has outstanding 275,000 fully vested warrants to acquire its common stock at an exercise price of $2 per share. The warrants expire in 2014. The warrants have no intrinsic value at March 31, 2012.

G. LEGAL PROCEEDINGS

On February 15, 2011, the Company filed a complaint in U.S. District Court for the District of Minnesota against Aurora Financial Systems, Inc. (“Aurora”) for declaratory judgment, tortious interference and other related claims concerning assertions by Aurora regarding United States Patent No. 7,229,006. The complaint related to Aurora’s improper and unlawful assertions of patent against certain software owned by the Company which was lawfully acquired from the software’s owner and inventor before the purported assignment of any patent rights to Aurora. Even though Aurora was aware of the lawful acquisition yet they have made repeated claims about the Company’s purported patent infringement relating to the Company’s use and licensing of the software to various financial institutions with which the Company has sought business relationship. The Company is seeking a declaration of non-infringement based on legal estoppel and implied license as well as a judgment that Aurora has committed tortious interference with prospective economic advantage, false advertising under the Lanham Act and has violated Minnesota’s Deceptive Trade Practices Act. As of March 31, 2012 the case has been in discovery and Aurora has not countersued. On May 4, 2012 the case was dismissed with prejudice with each party bearing its own fees and costs. In addition to the preceding lawsuit, the Company is subject to various legal proceedings from time to time in the ordinary course of business, none of which is required to be disclosed.

H. AGREEMENTS

During the quarter ended September 30, 2011, the Company signed a 5-year agreement with Antero Payment Solutions for the use of each others’ technologies among other things and to promote and market each others’ prepaid debit card programs. Under the terms of the agreement the Company received $25,000 as an up front license fee, which the Company has reflected as deferred revenue to be amortized over the term of the agreement. The agreement has a 5-year automatic renewal clause unless terminated by a written consent of both parties. During the nine months ended March 31, 2012, the Company recognized revenue of $2,833 relating to this agreement. As of March 31, 2012, the balance remaining to be recognized was $22,167.

The Company also signed a 5-year strategic agreement with National Identity Solutions (NIS) for the promotion and marketing of the Company’s prepaid debit card program and NIS’ identity theft solutions. The agreement requires NIS to pay an up front license fee of $250,000 of which $125,000 was paid as of September 30, 2011 with the remaining balance of $125,000 paid as of December 31, 2011. Both payments have been reflected as deferred revenue to be amortized over the term of the agreement. The agreement automatically renews annually unless terminated by either party. During the nine months ended March 31, 2012, the Company recognized revenue of $22,153 relating to this agreement. As of March 31, 2012, the balance remaining to be recognized was $227,847.

I. SUBSEQUENT EVENTS

Subsequent to the quarter ended March 31, 2012, the Company borrowed a total of $4,500 from its current CEO and a board member, Van Tran, at 8% annual interest due on demand. The note is convertible into the Company’s common stock at the rate of one share for every $0.08 of indebtedness.

On May 18, 2012, the Company entered into an Amended and Restated Unsecured Promissory Note with Larry Konfirst (“Amended Note”). The Amended Note, amends, restates and supersedes in its entirety that certain promissory note dated January 16, 2012 issued by the Company in favor of Mr. Konfirst (“Original Note”). Under the Amended Note, the Company is obligated to repay $500,000 to Mr. Konfirst plus simple interest at the rate of 5% per annum, accruing from the date of the Original Note, on or before January 16, 2013. The loan amount may only be used for the purpose of funding a certificate of deposit for the purpose of providing security for the Company’s prepaid debit card distribution at First California Bank (or its assigns). The Amended Note is subject to the Letter Agreement by and among the Company, Larry Konfirst and two shareholders of the Company dated May 18, 2012. Pursuant to the Letter Agreement, the shareholders have confirmed their agreement to give Mr. Konfirst an option to purchase up to 1,600,000 shares of unrestricted shares of common stock of the Company at $0.40 per share, payable by cancelling monies owned by the Company under the Amended Note. In the event Mr. Konfirst exercises this option, the Company has agreed to issue a convertible note to the shareholders in an amount equal to the debt cancelled in favor of the Company. This note, if and when issued, will mature after a period of 180 days from the date of issuance, accrue simple interest at 4% per annum, and be convertible into shares of the Company’s restricted common stock at a rate of $0.08 per share at the option of these shareholders.

ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations – March 31, 2012 compared to March 31, 2011

We had a net loss of $220,889 for the three months ended March 31, 2012, compared to a net loss of $223,396 for the three months ended March 31, 2011. For the nine months ended March 31, 2012, we had a net loss of $586,569 compared to a net loss of $768,908 for the nine months ended March 31, 2011.

Revenue

License and other revenues are derived from our product identification systems sold principally to customers in the LCD monitor industry. For the three months ended March 31, 2012, license and other revenue was $184,358 compared to $212,851 for the three months ended March 31, 2011, a decrease of $28,493. The license and other revenue decreases are attributable to the decrease in demand for licenses during the quarter. Revenues from the LCD market remain unpredictable as they are generated when customers open new production facilities or update production equipment. For the nine months ended March 31, 2012 and 2011, license and other revenues was $452,416 and $678,919, respectively. The decrease was due to the decrease in demand for licenses.

Cost of Goods Sold

Cost of sales for the three months ended March 31, 2012 totaled $74,298 and for the three months ended March 31, 2011, cost of sales were $83,714, a net decrease of $9,416. The decrease in cost of sales for the three months ended March 31, 2012, was the result of a reduction in the use of hardware inventories during the quarter. For the nine months ended March 31, 2012, the cost of sales totaled $188,415 compared to the nine months ended March 31, 2011 of $260,468. The net decrease of $72,053 was mainly due to a reduction in cost of maintaining the Company’s data processing center for its mobile banking operations and the reduction in the use of hardware inventories for the period. This decrease was offset by increases in network costs that increased by $5,632.

Operating Expenses

Sales and marketing expense for the three months ended March 31, 2012 were $34,075 compared to $38,717 for the three months ended March 31, 2011, a decrease of $4,642. For the three months ended March 31, 2012, the Company had one direct sales staff person. The Company, for the three months ended March 31, 2012, paid out commissions of $299 compared to $185 for the three month period ended March 31, 2011. Sales and marketing expense for the nine months ended March 31, 2012 was $109,848 compared to $114,474 for the nine months ended March 31, 2011, a difference of $4,626. For the nine months ended March 31, 2012 the Company had one direct sales staff.

General and administrative expenses for the three months ended March 31, 2012 were $169,356 compared to $235,879 for the three months ended March 31, 2011, a decrease of $66,523 over the three months ended March 31, 2011. The decrease was mainly the result of decreases in some of the expenditures for the three months ended March 31, 2012, compared to the three months ended March 31, 2011. Legal fees decreased by $59,860 due to the waning down of the Aurora case discussed under legal proceedings. The Company also saw decreases of $3,197 in depreciation expense, $6,588 in payroll and related costs and $6,405 in health insurance expense. These decreases were offset by increases in temporary/contract help of $13,413 and patent renewal expense of $6,556 over the three months ended March 31, 2011. For the nine months ended March 31, 2012, general and administrative expenses were $425,472 versus $768,559 for the nine months ended March 31, 2011, a decrease of $343,087. The reduction was mainly the result of decreases in most of the expenditure for the nine months ended March 31, 2012. Payroll expense decreased by $38,301 due to a reduction in staff levels. The Company also saw decreases in legal fees of $161,274, $9,000 in professional fees, $9,591 in depreciation expense, $34,576 in patent renewal expense, $60,000 in bad debts expense, $24,374 in payroll penalty and interest expense, $8,259 in health insurance expense, and $7,326 in travel expense. These decreases were offset by an increase in contract/temporary help expense of $22,375.

Research and development expense for the three months ended March 31, 2012 totaled $55,896 versus $38,896 for the three months ended March 31, 2011. The increase of $17,000 was principally the result of an increase in contract/temporary expense that increased by $31,884 but was offset by a decrease of $14,884 in payroll costs. For the nine months ended March 31, 2012, research and development costs was $162,686 compared to $183,720 for the nine months ended March 31, 2011, a difference of $21,034. For the nine month ended March 31, 2012, the engineering payroll costs decreased by $91,704 due to a reduction in staff levels but consulting expense increased by $70,669 as the Company used more consulting services.

Other Income (Expense)

Interest income for the three months ended March 31, 2012 and 2011 was $106 and $0, respectively. Interest expense for the three months ended March 31, 2012 was $71,622 compared to $39,041 in the same period ended March 31, 2011. The increase was the result of issuance of notes payable. For the nine months ended March 31, 2012 and 2011 interest income was $110 and $0, respectively. For the nine months ended March 31, 2012 and 2011, interest expense was $152,674 and $120,606, respectively. The increase was the result of issuance of notes payable.

Liquidity

Our increase in cash and cash equivalent to $57,224 at March 31, 2012 compared to $14,996 at June 30, 2011 was mainly the result of $437,104 used in operating activities and $489,500 provided by financing activities. Net cash used in operations during 2012 was $437,104 compared with $79,176 used in operations during the same period in 2011. Cash used in operations during 2012 was primarily due to the $500,000 we were required to provide a bank as a guarantee for a prepaid card program, the increase in deferred revenue offset by the net loss in the period, decreases in accounts receivable and decreases in accrued expenses. Net cash used in investing activities was $10,168 during 2012 compared with $60,000 net cash used in investing activities during 2011 which was primarily the result of payment on note receivable. Net cash provided by financing activities of $489,500 during 2012 was due to proceeds from notes payable of $489,500. During the same period in 2011, the net cash provided by financing activities of $129,200 was from net proceeds from notes payable.

The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. During the nine months ended March 31, 2012, the Company had a net loss of $586,569. At March 31, 2012, the Company had a working capital deficit of $4,028,045 and a stockholders’ deficiency of $4,023,445. The Company is delinquent or in default of $2,390,778 of its notes payable and is delinquent in payment of certain amounts due of $474,781 for payroll taxes and accrued interest and penalties as of March 31, 2012. The Company’s operations are currently being supported by borrowings from affiliated parties, and its cash and forecasted cash flow from operations will not be sufficient to continue operations without continued external investment. The Company believes it will require additional funds in the near future to continue its operations 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 further 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 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.

If the Company is not successful in raising additional funds, generating sufficient revenues or implementing sufficient cost reductions, the Company may be forced to suspend or discontinue its operations or seek relief from its debt obligations under the United States Bankruptcy Code. Any of these actions is likely to result in a common stockholder’s loss of his or her complete investment in the Company’s common stock.

Subsequent to the quarter ended March 31, 2012, the Company borrowed a total of $4,500 from its current Chief Executive Officer and director, Van Tran, pursuant to a convertible demand note that bears interest at rate of 8% per annum. The note is convertible into the Company’s common stock at the rate of one share per every $0.08 of indebtedness.

Recent Accounting Pronouncements

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements.

Critical Accounting Policies

Stock-Based Compensation:

The Company periodically issues stock options and warrants to employees and non-employees in capital raising transactions, for services and for financing costs. Stock-based compensation for employees is measured at the grant date, based on the fair value of the award, and is recognized as expense over the requisite service period. Options vest and expire according to terms established at the grant date. The value of the stock compensation to non-employees is based upon the measurement date as determined at either (a) the date at which a performance commitment is reached or (b) at the date at which the necessary performance to earn the equity instruments is complete.

We estimate volatility and forfeitures based upon historical data. As permitted by the authoritative guidance issued by the FASB, we use the “simplified” method to determine the expected life of an option due to the Company’s lack of sufficient historical exercise data to provide a reasonable basis, which is a result of the relative high turnover rates experienced in the past for positions granted options. All of these variables have an effect on the estimated fair value of our share-based awards.

Revenue Recognition:

The Company accounts for revenue recognition in accordance with SEC Staff Accounting Bulletin (SAB) No. 101 "Revenue Recognition in Financial Statements" and related amendments. Revenues for the Company are classified into four separate products; license revenue (Veritec’s Multi-Dimensional matrix symbology), hardware revenue, identification card revenue, and debit card revenue. Revenues from licenses, hardware, and identification cards are recognized when the product is shipped and collection is reasonably assured. The process typically begins for license and hardware revenue with a customer purchase order detailing its hardware specifications so the Company can import its software into the customer's hardware. Once importation is completed, if the customer only wishes to purchase a license, the Company typically transmits the software to the customer via the Internet. Revenue is recognized at that point. If the customer requests both license and hardware products, once the software is imported into the hardware and the process is complete, the product is shipped and revenue is recognized at time of shipment. Once the software and/or hardware are either shipped or transmitted, the customers do not have a right of refusal or return. Under some conditions, the customers remit payment prior to the Company having completed importation of the software. In these instances, the Company delays revenue recognition and reflects the prepayments as customer deposits.

The process for identification cards begins when a customer requests, via the Internet, an identification card. The card is reviewed for design and placement of the data, printed and packaged for shipment. At the time the identification cards are shipped and collection is reasonably assured, revenue is recognized.

The Company, as a processor and a distributor, recognizes revenue from transaction fees charged cardholders for the use of its issued mobile debit cards. The fees are recognized on a monthly basis after all cardholder transactions have been summarized and reconciled with third party processors.

ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

A smaller reporting company is not required to provide the information required by this Item 3.

ITEM 4 CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures.

Our management, with the participation of our chief executive officer and our chief financial officer, carried out an evaluation of the effectiveness of our “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 (the “Exchange Act”) Rules 13a-15(e) and 15-d-15(e)) as of the end of the period covered by this report (the “Evaluation Date”). Based upon that evaluation, our chief executive officer and our chief financial officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were not effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act (i) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (ii) is accumulated and communicated to our management, including our chief executive officer and our chief financial officer, as appropriate to allow timely decisions regarding required disclosure. As of March 31, 2012, our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses in our internal control over financial reporting described in our Form 10-K at June 30, 2011.

Changes in Internal Control over Financial Reporting.

In our Form 10-K at June 30, 2011, we identified certain matters that constitute material weaknesses (as defined under the Public Company Accounting Oversight Board Auditing Standard No. 2) in our internal control over financial reporting as discussed on Management’s Report on Internal Control Over Financial Reporting. We are undergoing ongoing evaluation and improvements in our internal control over financial reporting. Regarding our identified weaknesses, we have performed the following remediation efforts:

•

We have assigned our audit committee with oversight responsibilities.

•

Our financial statements, periodic reports filed pursuant to the Securities Exchange Act of 1934, as amended, our monthly bank statements and imaged checks are now continuously reviewed by our chief financial officer and chief executive officer.

•

All significant contracts are now being reviewed and approved by our board of directors in conjunction with the chief executive officer.

There was no other change in our internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II

ITEM 1 LEGAL PROCEEDINGS

ITEM 1A RISK FACTORS

A smaller reporting company is not required to provide the information required by this Item.

ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3 DEFAULTS UPON SENIOR SECURITIES

The Company is in default on its various notes payable totaling $2,390,778 representing principal and accrued interest as of the date of filing this report.

ITEM 4 MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5 OTHER INFORMATION

The Company is delinquent in payment of $474,781 for payroll taxes and accrued interest and penalties as of March 31, 2012.

ITEM 6 EXHIBITS

10.1	Amended and Restated Promissory Note by Veritec, Inc. in favor of Larry Konfirst dated May 18, 2012.
10.2	Letter Agreement by and among Veritec, Inc. and Larry Konfirst, John Johanns and Mary Adams dated May 18, 2012.
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.1⁺	The following financial information from Veritec, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012 formatted in XBRL: (i) Consolidated Balance Sheets at March 31, 2012 and June 30, 2011; (ii) Consolidated Statement of Operations for the three and nine months ended March 31, 2012 and 2011; (iii) Consolidated Statement of Stockholders’ Deficit as at March 31, 2012; (iv) Consolidated Statements of Cash Flows for the nine months ended March 31, 2012 and 2011; (v) Notes to the Consolidated Financial Statements.

**In accordance with SEC Release 33-8238, Exhibit 32.1 and 32.2 are being furnished and not filed.

⁺Furnished herewith. XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

VERITEC, INC.

By /s/ Van Tran May 22, 2012

Van Tran

Chief Executive Officer

(Principal Executive Officer)

By /s/ John Quentin May 22, 2012

John Quentin

Chief Financial Officer (Principal Financial Officer)

EX-10 2 vrtc10q0517exhib101.htm

Exhibit 10.1

AMENDED AND RESTATED UNSECURED PROMISSORY NOTE

$500,000.00

Issuance Date: May 18, 2012

Golden Valley, Minnesota

FOR VALUE RECEIVED, Veritec, Inc., a Nevada corporation (“Maker”), promises to pay to Larry L. Konfirst, an individual, (“Holder”), or his registered assigns the sum of FIVE HUNDRED THOUSAND DOLLARS ($500,000) (the “Principal Amount”) with simple interest accruing from January 16, 2012 at the rate of five percent (5.0%) per annum, due and payable on January 16, 2013 (the “Maturity Date”). This Amended and Restated Unsecured Promissory Note (“Note”) amends, restates and supersedes in its entirety that certain promissory note dated January 16, 2012 issued by Maker in favor of the Holder. This Note is issued in conjunction with that certain letter agreement by and among Maker, Holder, John Johannes (J. Technologies) and Mary Adams of even date herewith (“Letter Agreement”). Capitalized terms not otherwise defined herein have the meanings ascribed to them in the Letter Agreement.

1. Payment; Prepayment. All payments under this Note shall be made in lawful money of the United States of America at such place as the Holder hereof may from time to time designate in writing to the Company. This Note may be prepaid in whole or in part at any time without premium or penalty upon 30 days’ written notice to Holder; provided however that Holder will have the right to exercise the Option during this notice period.

2. Use of Funds. The Principal Amount may be used by Maker solely for the purpose of funding a certificate of deposit for the purpose of providing security for Maker’s credit card distribution at First California Bank or its assigns.

3. Events of Default. The occurrence of any of the following shall constitute an “Event of Default” under this Note:

(a) Failure to Pay. Maker shall fail to pay any payment required under the terms of this Note on the date due; or

(b) Failure to Perform. Maker shall fail to perform any obligation under this Note or the Letter Agreement; or

(c) Voluntary Bankruptcy or Insolvency Proceedings. Maker shall (i) apply for or consent to the appointment of a receiver, trustee, liquidator or custodian of itself or of all or a substantial part of its property, (ii) be unable, or admit in writing its inability, to pay its debts generally as they mature, (iii) make a general assignment for the benefit of its or any of its creditors, (iv) be dissolved or liquidated, (v) become insolvent (as such term may be defined or interpreted under any applicable statute) or (vi) commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any bankruptcy, insolvency or other similar law now or hereafter in effect or consent to any such relief or to the appointment of or taking possession of its property by any official in an involuntary case or other proceeding commenced against it and any such proceeding shall not be dismissed or discharged within sixty (60) days of commencement; or

(d) Involuntary Bankruptcy or Insolvency Proceedings. Proceedings for the appointment of a receiver, trustee, liquidator or custodian of Maker or of all or a substantial part of the property thereof, or an involuntary case or other proceedings seeking liquidation, reorganization or other relief with respect to Maker or the debts thereof under any bankruptcy, insolvency or other similar law now or hereafter in effect shall be commenced and an order for relief entered or such proceeding shall not be dismissed or discharged within sixty (60) days of commencement.

4. Rights of Holder upon Default. Upon the occurrence or existence of any Event of Default (other than an Event of Default, referred to in Sections 3(c) and 3(d)) and at any time thereafter during the continuance of such Event of Default, Holder may, by written notice to Maker, declare all outstanding obligations payable by Maker under the Note to be immediately due and payable without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived. Upon the occurrence or existence of any Event of Default described in Sections 3(c) and 3(d), immediately and without notice, all outstanding obligations payable by Maker under the Note shall automatically become immediately due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived. In addition to the foregoing remedies, upon the occurrence or existence of any Event of Default, Holder may exercise any other right power or remedy permitted by law, either by suit in equity or by action at law, or both.

5. Successors and Assigns. The rights and obligations of Maker and Holder of this Note shall be binding upon and benefit the successors, assigns, heirs, administrators and executors of the parties.

6. Waiver and Amendment. Any term of this Note may be amended or waived only with the written consent of Maker and Holder.

7. Failure or Indulgence Not Waiver. No failure or delay on the part of the Holder in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege.

8. Notices. Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective as provided in the Letter Agreement.

9. Governing Law and Jurisdiction. This Note and all actions arising out of or in connection with this Note shall be governed by and construed in accordance with the laws of the State of Minnesota, without regard to the conflicts of law provisions of the State of Minnesota, or of any other state. All disputes or controversies relating to or arising from this Note shall be adjudicated in the state and federal courts located in the County of Hennepin, State of Minnesota.

10. Attorneys’ Fees. If this Note is not paid in full when due, the Maker promises to pay all reasonable costs and expenses of collection and reasonable outside attorneys’ fees and expenses and court costs incurred by the Holder hereof on account of such collection whether or not suit is filed thereon.

IN WITNESS WHEREOF, Maker has caused this Amended and Restated Unsecured Promissory Note to be issued as of the date first written above and Holder agrees to the terms and conditions of this Amended and Restated Unsecured Promissory Note.

VERITEC, INC.,

a Nevada corporation

/s/ Van Tran

Van Tran, Chief Executive Officer

AGREED TO AND ACCEPTED:

LARRY L. KONFIRST,

an individual

/s/ Larry L. Konfirst

Larry L. Konfirst

EX-10 3 vrtc10q0517exhib102.htm

Exhibit 10.2

	Veritec, Inc.
	2445 Winnetka Avenue N.
	Golden Valley, MN 55427
	Facsimile: (763) 253-0503

May 18, 2012

John Johanns

255 No. Sterra St. #1119

Reno, Nevada 89501

Mary Adams

1521 71^st St.

Keystone,

IA 52249

Larry L. Konfirst

7942 Zionsville Road

Indianapolis, IN 46268

Re: Letter Agreement

Ladies and Gentlemen:

Reference is made to that certain promissory note dated January 16, 2012 in the principal amount of $500,000 issued by Veritec, Inc., a Nevada corporation (the “Company”) in favor of Larry L. Konfirst (the “Note Holder”), as amended and restated May 18, 2012 (the “Note”).

RECITALS

WHEREAS, John Johanns (J Technologies) owns 1,328,004 unrestricted shares of common stock of the Company and Mary Adams owns 211,996 unrestricted shares of common stock of the Company for an aggregate of 1.6 million shares (the “Shares”). John Johanns and Mary Adams are individually referred to herein as a “Shareholder”, collectively as the “Shareholders”;

WHEREAS, it was in the best interests of the Company and its shareholders to borrow $500,000 from the Note Holders to be held in a certificate of deposit for the purpose of providing security for the Company’s credit card distribution at Palm Desert Bank (later assigned to First California Bank);

WHEREAS, in order to induce the Note Holder to extend the $500,000 loan to the Company, the Shareholders agreed to provide the Note Holders with an option to purchase the Shares at a price per share of $0.40 for an aggregate purchase price of $640,000, for a term of one year, terminating on January 16, 2013; and

WHEREAS, the Option is exercisable by cancelling principal and interest due under the Note and by remitting the remaining proceeds, if any, to the Shareholders subject to issuance by the Company of a convertible promissory note in favor of the Shareholders.

NOW THEREFORE, in consideration of the mutual promises, covenants, representations and warranties set forth in this Letter Agreement, the parties, desiring to be legally bound hereby, agree as follows:

AGREEMENT

1. The Shareholders hereby grant the Note Holder an option (“Option”) to acquire the Shares at a price of $0.40 per Share for an aggregate purchase price up to $640,000 (the “Exercise Price”).

2. The foregoing Option shall be exercisable up to the whole by the Note Holder, until its expiration date which shall be January 16, 2013.

3. Except as specifically provided herein, the Exercise Price for the Option may be paid only by cancellation of outstanding principal and accrued interest under the Note as of the exercise date (“Payoff Amount”). If the Exercise Price exceeds the Payoff Amount, the Company shall cancel the Note, and the Note Holder shall within five (5) days tender cash to the Shareholders equal to the difference between the Exercise Price and the Payoff Amount. If the Payoff Amount under the Note exceeds the Exercise Price, the Company shall cancel the Note and re-issue a remainder note of like tenor and terms, with the same maturity date, in the principal amount equal to (a) the Payoff Amount, less (b) the total Exercise Price.

4. Upon exercise of the Option by the Note Holder, the Company will issue a convertible promissory note to the Shareholders (“Convertible Note”). If the Exercise Price exceeds the Payoff Amount, the principal amount of the Convertible Note will equal the Payoff Amount. If the Payoff Amount exceeds the Exercise Price, the principal amount of the Convertible Note will equal the Exercise Price. The Convertible Note will bear interest at a rate of four percent (4%) per annum, will mature after a period of 180 days, and will provide for the conversion of principal and interest due under the Convertible Note to restricted shares of common stock of the Company at a rate of $0.08 per share, at the option of the holder, at any time prior to the maturity date. No payments will be due under the Convertible Note until the maturity date, and the Convertible Note will not provide for prepayment premiums or penalties, late fees or default interest rate. The Convertible Note will contain customary terms and conditions defining the Shareholders’ rights in the event of default by the Company.

5. The Option will be deemed exercised by the Note Holder upon delivery of written notice to each of the Company and the Shareholders specifying the Note Holder’ election to exercise the Option (“Notice of Exercise”), together with the originally executed Note to be surrendered to the Company for cancellation.

6. The Option may be exercised by less than all of the Note Holder provided that the Note Holder electing not to participate in the exercise of the Option assign their interest in the Note to the Note Holder electing to exercise the Option.

7. Each Shareholder agrees to refrain from selling, transferring, pledging or hypothecating its interest in the Shares prior to expiration of the Option.

8. The Option is not transferrable by the Note Holder except amongst each other.

9. The parties agree and covenant to use their best efforts to comply with applicable laws regarding the issuance of Convertible Note, which may include but shall not be limited to the preparation and delivery of information and disclosures required under securities laws.

10. This Letter Agreement and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. This Letter Agreement will be interpreted, construed, and governed by the internal laws of the State of Minnesota without regard for principles of conflicts of law. The parties hereby submit to the jurisdiction of the state and federal courts located in the State of Minnesota, County of Hennepin in any proceeding arising out of or relating to this Letter Agreement. In any litigation between the parties arising under this Letter Agreement, the prevailing party shall be entitled to recover reasonable attorneys’ fees and other litigation costs from the non-prevailing party. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. This Letter Agreement, except for the Note, contains the entire agreement between the parties regarding the subject matter set forth herein.

11. Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of (a) the next business day after the date of transmission, if such notice or communication is delivered via facsimile on any business day, (b) the next business day following the date of mailing, if sent by U.S. nationally recognized overnight courier service, or (c) upon actual receipt by the party to whom such notice is required to be given. The addresses and facsimile numbers for such notices and communications are as set forth on the first page of this Letter Agreement.

This letter agreement has been executed and delivered by the parties as of this 18^th day of May, 2012.

COMPANY:

VERITEC, INC.,

a Nevada corporation

/s/ Van Tran

Van Tran, Chief Executive Officer

AGREED TO AND ACCEPTED:

SHAREHOLDERS: JOHN JOHANNS

/s/ John Johanns

John Johanns, an individual

MARY ADAMS

/s/ Mary Adams

Mary Adams, an individual

NOTE HOLDERS: LARRY L. KONFIRST,

/s/ Larry L. Konfirst

Larry L. Konfirst, an individual

EX-31 4 vrtc10q0517exhib311.htm

Exhibit 31.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Van Tran, certify that:

I have reviewed this quarterly report on Form 10-Q of Veritec, Inc.;

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statement made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

As certifying officer, I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d015f)) for the registrant and have:

(a)

designed such disclosure controls and procedures, or caused such internal control over financial reporting to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)

evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)

disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

As certifying officer, I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)

all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Dated: May 21, 2012

By: /s/ Van Tran

Van Tran, Chief Executive Officer (Principal Executive Officer)

EX-31 5 vrtc10q0517exhib312.htm

Exhibit 31.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, John Quentin, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Veritec, Inc.;

(a)

(b)

(c)

(d)

(a)

(b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Dated: May 21, 2012

By: /s/ John Quentin

John Quentin, Chief Financial Officer

(Principal Financial Officer)

EX-32 6 vrtc10q0517exhib321.htm

Exhibit 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Veritec, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2012, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Van Tran, Chief Executive Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

By: /s/ Van Tran

Van Tran, Chief Executive Officer
(Principal Executive Officer)

Date: May 21, 2012

EX-32 7 vrtc10q0517exhib322.htm

Exhibit 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Veritec, Inc. (the “Company”) on Form 10-Q for the period ended March 31, 2012, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John Quentin, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

By: /s/ John Quentin

John Quentin, Chief Financial Officer
(Principal Financial Officer)

Date: May 21, 2012

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A. NATURE OF BUSINESS   References to the Company in this Form 10-Q refer to Veritec, Inc. (Veritec) and its wholly owned subsidiaries VCode Holdings, Inc. (VCode) and Veritec Financial Systems, Inc. (VTFS).   The Company is primarily engaged in the development, marketing, sales and licensing of products and rendering of professional services related thereto in the following two fields of technology: (1) proprietary two-dimensional matrix symbology (also commonly referred to as two-dimensional barcodes or 2D barcodes) and (2) mobile banking solutions.   The Companys two-dimensional matrix symbology technology will hereafter be referred to as the Companys Barcode Technology, and the Companys mobile banking technology will hereafter be referred to as its Mobile Banking Technology.   The Companys Barcode Technology was originally invented by the founders of Veritec under United States patents 4,924,078, 5,331,176, 5,612,524 and 7,159,780. Our principal licensed product to date that contains our VeriCode® Barcode Technology has been a product identification system for identification and tracking of manufactured parts, components and products. The VeriCode® symbol is a two-dimensional high data density machine-readable symbol that can contain up to approximately 500 bytes of data.   The Companys VSCode® Barcode Technology is a derivative of the VeriCode® symbol with the ability to encrypt a greater amount of data by increasing data density. The VSCode® is a data storage container that offers a high degree of security and which can also be tailored to the application requirements of the user. The VSCode® symbol can hold any form of binary information that can be digitized, including numbers, letters, images, photos, graphics, and the minutia for biometric information, including fingerprints and facial image data, to the extent of its data storage capacity, that are likewise limited by the resolution of the marking and reading devices employed by the user. VSCode® is ideal for secure identification documents (such as national identification cards, drivers licenses, and voter registration cards), financial cards, medical records and other high security applications.   In its PhoneCodes product platform, Veritec developed software to send, store, display, and read a VeriCode® Barcode Technology symbol on the LCD screen of a mobile phone. With the electronic media that provide the ease of transferring information over the web, Veritecs PhoneCodes technology enables individuals and companies to receive or distribute gift certificates, tickets, coupons, receipts, or engage in banking transactions using the VeriCode® technology via wireless phone or PDA.   On January 12, 2009, Veritec formed VTFS, a Delaware corporation, to bring its Mobile Banking Technology, products and related professional services to market. In May 2009 Veritec was registered by Security First Bank in Visas Third Party Registration Program as a Cardholder Independent Sales Organization and Third-Party Servicer. As a Cardholder Independent Sales Organization, Veritec was able to promote and sell Visa branded card programs. As a Third-Party Servicer, Veritec provided back-end cardholder transaction processing services for Visa branded card programs on behalf of Security First Bank. As of October 2010 the Companys registration with Security First Bank terminated. As of April 2011 the Company signed an ISO and processor agreement with Palm Desert National Bank (which was later assigned to First California Bank) to market and process the Companys Visa branded card program on behalf of the bank.   Our VeriSuite card enrollment system was released in July 2009. The VeriSuite system is a user friendly and cost effective solution that gives governments and businesses the ability to provide cardholders with an identity card containing Veritecs VSCode® Barcode Technology. The VeriSuite system provides secure Bio-ID Cards such as citizen identification, employee cards, health benefit cards, border control cards, financial cards and more.   The Company has a portfolio of five United States and eight foreign patents. In addition, we have seven U.S. and twenty-eight foreign pending patent applications.

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-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 three and nine month periods ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending June 30, 2012. The Condensed Consolidated Balance Sheet as of June 30, 2011 was derived from the audited consolidated financial statements as of such date, but does not include all of the information and footnotes required by GAAP. For further information, refer to the Consolidated Financial Statements and footnotes thereto included in our Form 10-K as of and for the year ended June 30, 2011. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the 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, accruals for potential liabilities and assumptions made in valuing stock instruments issued for services.   The accompanying condensed consolidated financial statements include the accounts of Veritec, VCode, and VTFS. All inter-company transactions and balances were eliminated in consolidation.

C. GOING CONCERN The accompanying condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern. During the nine months ended March 31, 2012, the Company had a net loss of $586,569. At March 31, 2012, the Company had a working capital deficit of $4,028,045 and a stockholders deficiency of $4,023,445. The Company is delinquent or in default of $2,390,778 of its notes payable and is delinquent in payment of certain amounts due of $474,781 for payroll taxes and accrued interest and penalties as of March 31, 2012. The Company believes its cash and forecasted cash flow from operations will not be sufficient to continue operations through fiscal 2012 without continued external investment. The Company will require additional funds to continue its operations through fiscal 2012 and to continue to develop its existing projects and plans to raise such funds by finding additional investors to purchase the Companys securities, generating sufficient sales revenue, implementing dramatic cost reductions or any combination thereof. There is no assurance that the Company will 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.

D. SIGNIFICANT ACCOUNTING POLICIES   Net Loss per Common Share:   Basic earnings (loss) per share is 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 anti dilutive.   For the three and nine months ended March 31, 2012 and 2011 the calculations of basic and diluted loss per share are the same because potential dilutive securities would have an anti-dilutive effect.   There were 7,141,067 and 6,547,987 potentially dilutive securities as of March 31, 2012 and 2011, respectively.     Concentrations   During the three months ended March 31, 2012 and 2011, the Company had one customer that accounted for approximately 15% of sales in 2012, and four customers of which two customers accounted for approximately 13% each with the remaining two accounting for approximately 15% and 38% of sales in 2011, respectively. During the nine months ended March 31, 2012 and   2011, the Company had two customers that accounted for approximately 11% and 24% of sales in 2012, and four customers that accounted for approximately 12%, 13%, 16%, and 29% of sales in 2011, respectively. No other customers accounted for more than 10% of sales in either period. As of March 31, 2012 and June 30, 2011, the Company had approximately $14,025 (46%) and $6,050 (20%) and $4,125 (14%) and $6,050 (16%), $10,963 (29%), $10,025 (27%), and $5,300 (14%), respectively, of accounts receivable from its major customers.   For the three months ended March 31, 2012 and 2011, foreign revenues accounted for 30% (22% Korea and 8% Taiwan) and 87% (72% Korea and 15% Taiwan) of the Companys total revenues respectively. For the nine months ended March 31, 2012 and 2011, foreign revenues accounted for 47% (40% Korea and 7% Taiwan) and 93% (72% Korea, 19% Taiwan, and 2% others) of the Companys revenues respectively.   Recent Accounting Pronouncements   In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. ASU No. 2011-4 does not require additional fair value measurements and is not intended to establish valuation standards or affect valuation practices outside of financial reporting. The ASU is effective for interim and annual periods beginning after December 15, 2011. The Company will adopt the ASU as required. The ASU will affect the Companys fair value disclosures, but will not affect the Companys results of operations, financial condition or liquidity.   In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income. The ASU eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders equity, and instead requires consecutive presentation of the statement of net income and other comprehensive income either in a continuous statement of comprehensive income or in two separate but consecutive statements. ASU No. 2011-5 is effective for interim and annual periods beginning after December 15, 2011. The Company will adopt the ASU as required. It will have no affect on the Companys results of operations, financial condition or liquidity.   In September 2011, the FASB issued ASU 2011-08, Testing Goodwill for Impairment, an update to existing guidance on the assessment of goodwill impairment. This update simplifies the assessment of goodwill for impairment by allowing companies to consider qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount before performing the two step impairment review process. It also amends the examples of events or circumstances that would be considered in a goodwill impairment evaluation. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The Company is currently evaluating the affects adoption of ASU 2011-08 may have on its goodwill impairment testing.   Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the Securities Exchange Commission (the "SEC") did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements.

E. RESTRICTED CASH   The Company entered into a Store Value Prepaid Card Sponsorship Agreement (the Agreement) with a Bank. Whereas the Company has developed for marketing and management purposes, store value prepaid card programs (the Programs) which will be marketed and managed daily at the direction of the Bank. In connection with the agreement with the Bank, the Company established a Reserve Account controlled by the bank in the amount of $500,000. Since this amount is restricted for the purposes related to the Programs, it is classified as restricted cash on the condensed consolidated balance sheets.

F. NOTES PAYABLE   Notes payable consist of the following: <table cellspacing="0" cellpadding="0" style="width: 100%; border-collapse: collapse; font-size: 10pt"> <tr style="vertical-align: bottom"> <td> </td> <td style="padding-bottom: 1pt"> </td> <td colspan="3" style="border-bottom: black 1pt solid; text-align: center">March 31, 2012</td> <td style="padding-bottom: 1pt"> </td> <td colspan="3" style="border-bottom: black 1pt solid; text-align: center">June 30, 2011</td></tr> <tr style="vertical-align: bottom"> <td> </td> <td> </td> <td colspan="3" style="text-align: center">(UNAUDITED)</td> <td> </td> <td colspan="3"> </td></tr> <tr style="background-color: rgb(204,238,255); vertical-align: bottom"> <td style="text-align: left; padding-left: 5.4pt; width: 56%">Convertible notes payable (includes $122,926 and $116,899, respectively, to non-related parties), unsecured, interest at 8%, due September 2010 through November 2010. The principal and accrued interest are convertible at a conversion price of $0.30. The principal and interest is due immediately on the event of default or change of control. The holders also received warrants to purchase one share of common stock for every $2 of investment. The Company recorded a $20,981 discount on the notes payable for the value of the warrants issued. The discount was fully amortized over the term of the notes payable. There was no unamortized discount as of March 31, 2012 and June 30, 2011, respectively. The notes are now in default.</td> <td style="width: 8%"> </td> <td style="text-align: left; width: 1%">$</td> <td style="text-align: right; width: 12%">684,845</td> <td style="text-align: left; width: 1%"> </td> <td style="width: 8%"> </td> <td style="text-align: left; width: 1%">$</td> <td style="text-align: right; width: 12%">651,629</td> <td style="text-align: left; width: 1%"> </td></tr> <tr style="background-color: white; vertical-align: bottom"> <td style="padding-left: 5.4pt"> </td> <td> </td> <td style="text-align: left"> </td> <td style="text-align: right"> </td> <td style="text-align: left"> </td> <td> </td> <td style="text-align: left"> </td> <td style="text-align: right"> </td> <td style="text-align: left"> </td></tr> <tr style="background-color: rgb(204,238,255); vertical-align: bottom"> <td style="text-align: left; padding-left: 5.4pt">Convertible notes payable to related parties, unsecured, principal and interest are convertible into common stock at $0.08 to $0.33 per share, interest at 8 % to 10%, due July to November 2010. The notes are now in default.</td> <td> </td> <td style="text-align: left"> </td> <td style="text-align: right">840,463</td> <td style="text-align: left"> </td> <td> </td> <td style="text-align: left"> </td> <td style="text-align: right">766,914</td> <td style="text-align: left"> </td></tr> <tr style="background-color: white; vertical-align: bottom"> <td style="padding-left: 5.4pt"> </td> <td> </td> <td style="text-align: left"> </td> <td style="text-align: right"> </td> <td style="text-align: left"> </td> <td> </td> <td style="text-align: left"> </td> <td style="text-align: right"> </td> <td style="text-align: left"> </td></tr> <tr style="background-color: rgb(204,238,255); vertical-align: bottom"> <td style="text-align: left; padding-left: 5.4pt">Convertible note payable to related party, secured by the Companys intellectual property, principal and interest are convertible into common stock at $0.25 per share subject to board of directors approval, interest at 8%. The note was due November 2010 and is now in default.</td> <td> </td> <td style="text-align: left"> </td> <td style="text-align: right">238,882</td> <td style="text-align: left"> </td> <td> </td> <td style="text-align: left"> </td> <td style="text-align: right">226,828</td> <td style="text-align: left"> </td></tr> <tr style="background-color: white; vertical-align: bottom"> <td style="padding-left: 5.4pt"> </td> <td> </td> <td style="text-align: left"> </td> <td style="text-align: right"> </td> <td style="text-align: left"> </td> <td> </td> <td style="text-align: left"> </td> <td style="text-align: right"> </td> <td style="text-align: left"> </td></tr> <tr style="background-color: rgb(204,238,255); vertical-align: bottom"> <td style="text-align: left; padding-left: 5.4pt">Note payable to related party, secured by the Companys intellectual property, interest at 8% due August 2010 and is now is default.</td> <td> </td> <td style="text-align: left"> </td> <td style="text-align: right">464,174</td> <td style="text-align: left"> </td> <td> </td> <td style="text-align: left"> </td> <td style="text-align: right">441,014</td> <td style="text-align: left"> </td></tr> <tr style="background-color: white; vertical-align: bottom"> <td style="padding-left: 5.4pt"> </td> <td> </td> <td style="text-align: left"> </td> <td style="text-align: right"> </td> <td style="text-align: left"> </td> <td> </td> <td style="text-align: left"> </td> <td style="text-align: right"> </td> <td style="text-align: left"> </td></tr> <tr style="background-color: rgb(204,238,255); vertical-align: bottom"> <td style="text-align: left; padding-left: 5.4pt">Notes payable to related parties, unsecured, interest at 0% to 8%, due on demand.</td> <td> </td> <td style="text-align: left"> </td> <td style="text-align: right">124,436</td> <td style="text-align: left"> </td> <td> </td> <td style="text-align: left"> </td> <td style="text-align: right">118,408</td> <td style="text-align: left"> </td></tr> <tr style="background-color: white; vertical-align: bottom"> <td style="padding-left: 5.4pt"> </td> <td> </td> <td style="text-align: left"> </td> <td style="text-align: right"> </td> <td style="text-align: left"> </td> <td> </td> <td style="text-align: left"> </td> <td style="text-align: right"> </td> <td style="text-align: left"> </td></tr> <tr style="background-color: rgb(204,238,255); vertical-align: bottom"> <td style="text-align: left; padding-left: 5.4pt">Note payable, unsecured, interest at 10%, due January 2010 and is now in default.</td> <td> </td> <td style="text-align: left"> </td> <td style="text-align: right">24,669</td> <td style="text-align: left"> </td> <td> </td> <td style="text-align: left"> </td> <td style="text-align: right">23,162</td> <td style="text-align: left"> </td></tr> <tr style="background-color: white; vertical-align: bottom"> <td style="padding-left: 5.4pt"> </td> <td> </td> <td style="text-align: left"> </td> <td style="text-align: right"> </td> <td style="text-align: left"> </td> <td> </td> <td style="text-align: left"> </td> <td style="text-align: right"> </td> <td style="text-align: left"> </td></tr> <tr style="background-color: rgb(204,238,255); vertical-align: bottom"> <td style="text-align: left; padding-left: 5.4pt">Convertible note payable, unsecured, principal and interest are convertible into common stock at $0.30 per share subject to board of directors approval, interest at 8%, due January 2011 and is now in default.</td> <td> </td> <td style="text-align: left"> </td> <td style="text-align: right">11,786</td> <td style="text-align: left"> </td> <td> </td> <td style="text-align: left"> </td> <td style="text-align: right">11,183</td> <td style="text-align: left"> </td></tr> <tr style="background-color: white; vertical-align: bottom"> <td style="padding-left: 5.4pt"> </td> <td> </td> <td style="text-align: left"> </td> <td style="text-align: right"> </td> <td style="text-align: left"> </td> <td> </td> <td style="text-align: left"> </td> <td style="text-align: right"> </td> <td style="text-align: left"> </td></tr> <tr style="background-color: rgb(204,238,255); vertical-align: bottom"> <td style="text-align: left; padding-left: 5.4pt">Notes payable, unsecured, interest at 5%, due January 2013.(1)</td> <td> </td> <td style="text-align: left"> </td> <td style="text-align: right">452,349</td> <td style="text-align: left"> </td> <td> </td> <td style="text-align: left"> </td> <td style="text-align: right"></td> <td style="text-align: left"> </td></tr> <tr style="background-color: white; vertical-align: bottom"> <td style="padding-left: 5.4pt"> </td> <td> </td> <td style="text-align: left"> </td> <td style="text-align: right"> </td> <td style="text-align: left"> </td> <td> </td> <td style="text-align: left"> </td> <td style="text-align: right"> </td> <td style="text-align: left"> </td></tr> <tr style="background-color: rgb(204,238,255); vertical-align: bottom"> <td style="text-align: left; padding-left: 5.4pt">Convertible note payable, unsecured, principal and interest are convertible into common stock at $0.40 per share, interest at 5%, due March 2013.</td> <td> </td> <td style="text-align: left"> </td> <td style="text-align: right">10,034</td> <td style="text-align: left"> </td> <td> </td> <td style="text-align: left"> </td> <td style="text-align: right"></td> <td style="text-align: left"> </td></tr> <tr style="background-color: white; vertical-align: bottom"> <td style="padding-left: 5.4pt"> </td> <td> </td> <td style="text-align: left"> </td> <td style="text-align: right"> </td> <td style="text-align: left"> </td> <td> </td> <td style="text-align: left"> </td> <td style="text-align: right"> </td> <td style="text-align: left"> </td></tr> <tr style="background-color: rgb(204,238,255); vertical-align: bottom"> <td style="text-align: left; padding-bottom: 1pt; padding-left: 5.4pt">Convertible note payable, unsecured, principal and interest are convertible into common stock at $1.00 per share subject to board of directors approval, interest at 8% due November 2009 and is now in default.</td> <td style="padding-bottom: 1pt"> </td> <td style="border-bottom: black 1pt solid; text-align: left"> </td> <td style="border-bottom: black 1pt solid; text-align: right">1,523</td> <td style="text-align: left; padding-bottom: 1pt"> </td> <td style="padding-bottom: 1pt"> </td> <td style="border-bottom: black 1pt solid; text-align: left"> </td> <td style="border-bottom: black 1pt solid; text-align: right">1,523</td> <td style="text-align: left; padding-bottom: 1pt"> </td></tr> <tr style="background-color: white; vertical-align: bottom"> <td style="padding-left: 5.4pt"> </td> <td> </td> <td style="text-align: left"> </td> <td style="text-align: right"> </td> <td style="text-align: left"> </td> <td> </td> <td style="text-align: left"> </td> <td style="text-align: right"> </td> <td style="text-align: left"> </td></tr> <tr style="background-color: rgb(204,238,255); vertical-align: bottom"> <td style="padding-left: 5.4pt">Total</td> <td> </td> <td style="text-align: left"> </td> <td style="text-align: right">2,853,161</td> <td style="text-align: left"> </td> <td> </td> <td style="text-align: left"> </td> <td style="text-align: right">2,240,661</td> <td style="text-align: left"> </td></tr> <tr style="background-color: white; vertical-align: bottom"> <td style="padding-left: 5.4pt"> </td> <td> </td> <td style="text-align: left"> </td> <td style="text-align: right"> </td> <td style="text-align: left"> </td> <td> </td> <td style="text-align: left"> </td> <td style="text-align: right"> </td> <td style="text-align: left"> </td></tr> <tr style="background-color: rgb(204,238,255); vertical-align: bottom"> <td style="text-align: left; padding-bottom: 1pt; padding-left: 5.4pt">Less valuation discount on note payable</td> <td style="padding-bottom: 1pt"> </td> <td style="border-bottom: black 1pt solid; text-align: left"> </td> <td style="border-bottom: black 1pt solid; text-align: right">(102,224</td> <td style="text-align: left; padding-bottom: 1pt">)</td> <td style="padding-bottom: 1pt"> </td> <td style="border-bottom: black 1pt solid; text-align: left"> </td> <td style="border-bottom: black 1pt solid; text-align: right"></td> <td style="text-align: left; padding-bottom: 1pt"> </td></tr> <tr style="background-color: white; vertical-align: bottom"> <td style="padding-left: 5.4pt"> </td> <td> </td> <td style="text-align: left"> </td> <td style="text-align: right"> </td> <td style="text-align: left"> </td> <td> </td> <td style="text-align: left"> </td> <td style="text-align: right"> </td> <td style="text-align: left"> </td></tr> <tr style="background-color: rgb(204,238,255); vertical-align: bottom"> <td style="text-align: left; padding-bottom: 2.5pt; padding-left: 5.4pt">Grand total</td> <td style="padding-bottom: 2.5pt"> </td> <td style="border-bottom: black 2.5pt double; text-align: left">$</td> <td style="border-bottom: black 2.5pt double; text-align: right">2,750,937</td> <td style="text-align: left; padding-bottom: 2.5pt"> </td> <td style="padding-bottom: 2.5pt"> </td> <td style="border-bottom: black 2.5pt double; text-align: left">$</td> <td style="border-bottom: black 2.5pt double; text-align: right">2,240,661</td> <td style="text-align: left; padding-bottom: 2.5pt"> </td></tr> <tr style="background-color: white; vertical-align: bottom"> <td style="padding-left: 5.4pt"> </td> <td> </td> <td style="text-align: left"> </td> <td style="text-align: right"> </td> <td style="text-align: left"> </td> <td> </td> <td style="text-align: left"> </td> <td style="text-align: right"> </td> <td style="text-align: left"> </td></tr> </table>     (1) In connection with the issuance of the notes payable, two stockholders of the Company granted the lender the option to acquire 1,600,000 unrestricted shares of the Companys common stock from the stockholders at a price of $0.40 per share. The agreement to provide the lender with the option to purchase shares of the two shareholders was presumed to be a separate arrangement between the Company and the lender. As such, the Company valued the shares as if they had provided the lender an option to acquire these shares. The aggregate value of the 1,600,000 shares was valued at $129,931 using Black-Scholes option valuation model. The value of the option is being considered as a valuation discount and will be amortized over the one year life of the Note. For the period ended March 31, 2012, the Company recognized $27,707 of expense related to the amortization of this discount and is included in the interest expense in the condensed consolidated statement of operations. The remaining valuation discount on note payable of $102,224 at March 31, 2012 is reflected as a valuation discount and offset to notes payable in the condensed consolidated balance sheets.   For the purposes of Balance Sheet presentation notes payable have been grouped as follows:   <table cellspacing="0" cellpadding="0" style="width: 100%; border-collapse: collapse; font-size: 10pt"> <tr style="vertical-align: bottom"> <td nowrap="nowrap" style="padding-left: 5.4pt; width: 57%; padding-right: 5.4pt"> </td> <td nowrap="nowrap" style="text-align: center; padding-left: 5.4pt; width: 20%; padding-right: 5.4pt">March 31,</td> <td nowrap="nowrap" style="text-align: center; padding-left: 5.4pt; width: 3%; padding-right: 5.4pt"> </td> <td nowrap="nowrap" style="text-align: center; padding-left: 5.4pt; width: 20%; padding-right: 5.4pt">June 30,</td></tr> <tr style="vertical-align: bottom"> <td nowrap="nowrap" style="padding-left: 5.4pt; padding-right: 5.4pt"> </td> <td nowrap="nowrap" style="border-bottom: windowtext 1pt solid; text-align: center; padding-left: 5.4pt; padding-right: 5.4pt">2012</td> <td nowrap="nowrap" style="text-align: center; padding-left: 5.4pt; padding-right: 5.4pt"> </td> <td nowrap="nowrap" style="border-bottom: windowtext 1pt solid; text-align: center; padding-left: 5.4pt; padding-right: 5.4pt">2011</td></tr> <tr style="background-color: rgb(204,238,255); vertical-align: bottom"> <td nowrap="nowrap" style="padding-left: 5.4pt; padding-right: 5.4pt">Notes payable, net of discount of $102,224 and $0, respectively</td> <td nowrap="nowrap" style="text-align: center; padding-left: 5.4pt; padding-right: 5.4pt">$ 521,064</td> <td nowrap="nowrap" style="padding-left: 5.4pt; padding-right: 5.4pt"> </td> <td nowrap="nowrap" style="text-align: center; padding-left: 5.4pt; padding-right: 5.4pt">$ 152,767</td></tr> <tr style="background-color: white; vertical-align: bottom"> <td nowrap="nowrap" style="padding-left: 5.4pt; padding-right: 5.4pt">Notes payable, related party</td> <td nowrap="nowrap" style="text-align: center; padding-left: 5.4pt; padding-right: 5.4pt">2,229,873</td> <td nowrap="nowrap" style="padding-left: 5.4pt; padding-right: 5.4pt"> </td> <td nowrap="nowrap" style="text-align: center; padding-left: 5.4pt; padding-right: 5.4pt">2,087,894</td></tr> <tr style="background-color: rgb(204,238,255); vertical-align: bottom"> <td nowrap="nowrap" style="padding-left: 5.4pt; padding-right: 5.4pt"> </td> <td nowrap="nowrap" style="border-bottom: windowtext 2.25pt double; text-align: center; padding-left: 5.4pt; padding-right: 5.4pt; border-top: windowtext 1pt solid">$ 2,750,937</td> <td nowrap="nowrap" style="padding-left: 5.4pt; padding-right: 5.4pt"> </td> <td nowrap="nowrap" style="border-bottom: windowtext 2.25pt double; text-align: center; padding-left: 5.4pt; padding-right: 5.4pt; border-top: windowtext 1pt solid">$ 2,240,661</td></tr> </table>

F. STOCK-BASED COMPENSATION   Stock options   The Company has agreements with certain of its employees and independent contractor consultants that provide grants of options to purchase the Companys common stock.   A summary of stock options as of March 31, 2012 is as follows:   <table cellspacing="0" cellpadding="0" style="width: 100%; border-collapse: collapse; font-size: 10pt"> <tr style="vertical-align: bottom"> <td nowrap="nowrap" style="text-align: justify; padding-left: 0.75pt; padding-right: 0.75pt; padding-top: 0.75pt"> </td> <td nowrap="nowrap" style="text-align: center; padding-left: 0.75pt; padding-right: 0.75pt; padding-top: 0.75pt">Number of</td> <td nowrap="nowrap" style="text-align: justify; padding-left: 0.75pt; padding-right: 0.75pt; padding-top: 0.75pt"> </td> <td colspan="3" nowrap="nowrap" style="text-align: center; padding-left: 0.75pt; padding-right: 0.75pt; padding-top: 0.75pt">Weighted - Average</td></tr> <tr style="vertical-align: bottom"> <td nowrap="nowrap" style="text-align: justify; padding-left: 0.75pt; padding-right: 0.75pt; padding-top: 0.75pt"> </td> <td nowrap="nowrap" style="border-bottom: windowtext 1pt solid; text-align: center; padding-left: 0.75pt; padding-right: 0.75pt; padding-top: 0.75pt">Shares</td> <td nowrap="nowrap" style="text-align: justify; padding-left: 0.75pt; padding-right: 0.75pt; padding-top: 0.75pt"> </td> <td colspan="3" nowrap="nowrap" style="border-bottom: windowtext 1pt solid; text-align: center; padding-left: 0.75pt; padding-right: 0.75pt; padding-top: 0.75pt">Exercise Price</td></tr> <tr style="vertical-align: bottom"> <td nowrap="nowrap" style="text-align: justify; padding-left: 0.75pt; width: 55%; padding-right: 0.75pt; padding-top: 0.75pt"> </td> <td nowrap="nowrap" style="text-align: center; padding-left: 0.75pt; width: 11%; padding-right: 0.75pt; padding-top: 0.75pt"> </td> <td nowrap="nowrap" style="text-align: justify; padding-left: 0.75pt; width: 5%; padding-right: 0.75pt; padding-top: 0.75pt"> </td> <td nowrap="nowrap" style="text-align: justify; padding-left: 0.75pt; width: 8%; padding-right: 0.75pt; padding-top: 0.75pt"> </td> <td style="text-align: justify; width: 13%; border-top: windowtext 1pt solid"> </td> <td style="text-align: justify; width: 8%; border-top: windowtext 1pt solid"> </td></tr> <tr style="background-color: rgb(204,238,255); vertical-align: bottom"> <td nowrap="nowrap" style="text-align: justify; padding-left: 0.75pt; padding-right: 0.75pt; padding-top: 0.75pt">Outstanding at June 30, 2011</td> <td nowrap="nowrap" style="text-align: center; padding-left: 0.75pt; padding-right: 0.75pt; padding-top: 0.75pt">824,249</td> <td nowrap="nowrap" style="text-align: justify; padding-left: 0.75pt; padding-right: 0.75pt; padding-top: 0.75pt"> </td> <td nowrap="nowrap" style="text-align: justify; padding-left: 0.75pt; padding-right: 0.75pt; padding-top: 0.75pt"> </td> <td style="text-align: center">$0.47</td> <td style="text-align: justify"> </td></tr> <tr style="background-color: white; vertical-align: bottom"> <td nowrap="nowrap" style="text-align: justify; padding-left: 0.75pt; padding-right: 0.75pt; padding-top: 0.75pt">Expired</td> <td nowrap="nowrap" style="border-bottom: windowtext 1pt solid; text-align: center; padding-left: 0.75pt; padding-right: 0.75pt; padding-top: 0.75pt">(40,000)</td> <td nowrap="nowrap" style="text-align: justify; padding-left: 0.75pt; padding-right: 0.75pt; padding-top: 0.75pt"> </td> <td nowrap="nowrap" style="text-align: justify; padding-left: 0.75pt; padding-right: 0.75pt; padding-top: 0.75pt"> </td> <td style="text-align: center">$0.25</td> <td style="text-align: justify"> </td></tr> <tr style="background-color: rgb(204,238,255); vertical-align: bottom"> <td nowrap="nowrap" style="text-align: justify; padding-left: 0.75pt; padding-right: 0.75pt; padding-top: 0.75pt">Outstanding at March 31, 2012</td> <td nowrap="nowrap" style="border-bottom: windowtext 1.5pt double; text-align: center; padding-left: 0.75pt; padding-right: 0.75pt; padding-top: 0.75pt">784,249</td> <td nowrap="nowrap" style="text-align: justify; padding-left: 0.75pt; padding-right: 0.75pt; padding-top: 0.75pt"> </td> <td nowrap="nowrap" style="text-align: justify; padding-left: 0.75pt; padding-right: 0.75pt; padding-top: 0.75pt"> </td> <td style="text-align: center">$0.48</td> <td style="text-align: justify"> </td></tr> <tr style="background-color: white; vertical-align: bottom"> <td nowrap="nowrap" style="text-align: justify; padding-left: 0.75pt; padding-right: 0.75pt; padding-top: 0.75pt">Exercisable at March 31, 2012</td> <td nowrap="nowrap" style="border-bottom: windowtext 1.5pt double; text-align: center; padding-left: 0.75pt; padding-right: 0.75pt; padding-top: 0.75pt">784,249</td> <td nowrap="nowrap" style="text-align: justify; padding-left: 0.75pt; padding-right: 0.75pt; padding-top: 0.75pt"> </td> <td nowrap="nowrap" style="text-align: justify; padding-left: 0.75pt; padding-right: 0.75pt; padding-top: 0.75pt"> </td> <td style="text-align: center">$0.48</td> <td style="text-align: justify"> </td></tr> </table>   The weighted-average remaining contractual life of stock options outstanding and exercisable at March 31, 2012 is 2.2 years. The aggregate intrinsic value of stock options outstanding as of March 31, 2012 was $1,800.   The weighted-average fair value of options granted for the nine months ended March 31, 2012 and 2011 was $0.00 and $0.14, respectively.   Stock-based compensation expense was $0 and $338 during the three months ended March 31, 2012 and 2011, respectively. Stock based compensation expense was $2 and $1,208 during the nine months ended March 31, 2012 and 2011, respectively. As of March 31, 2012, there was no unrecognized compensation costs related to stock options.   Warrants   In connection with the issuance of certain convertible notes payable, the Company has outstanding 275,000 fully vested warrants to acquire its common stock at an exercise price of $2 per share. The warrants expire in 2014. The warrants have no intrinsic value at March 31, 2012.

G. LEGAL PROCEEDINGS   On February 15, 2011, the Company filed a complaint in U.S. District Court for the District of Minnesota against Aurora Financial Systems, Inc. (Aurora) for declaratory judgment, tortious interference and other related claims concerning assertions by Aurora regarding United States Patent No. 7,229,006. The complaint related to Auroras improper and unlawful assertions of patent against certain software owned by the Company which was lawfully acquired from the softwares owner and inventor before the purported assignment of any patent rights to Aurora. Even though Aurora was aware of the lawful acquisition yet they have made repeated claims about the Companys purported patent infringement relating to the Companys use and licensing of the software to various financial institutions with which the Company has sought business relationship. The Company is seeking a declaration of non-infringement based on legal estoppel and implied license as well as a judgment that Aurora has committed tortious interference with prospective economic advantage, false advertising under the Lanham Act and has violated Minnesotas Deceptive Trade Practices Act. As of March 31, 2012 the case has been in discovery and Aurora has not countersued. On May 4, 2012 the case was dismissed with prejudice with each party bearing its own fees and costs. In addition to the preceding lawsuit, the Company is subject to various legal proceedings from time to time in the ordinary course of business, none of which is required to be disclosed.

H. AGREEMENTS   During the quarter ended September 30, 2011, the Company signed a 5-year agreement with Antero Payment Solutions for the use of each others technologies among other things and to promote and market each others prepaid debit card programs. Under the terms of the agreement the Company received $25,000 as an up front license fee, which the Company has reflected as deferred revenue to be amortized over the term of the agreement. The agreement has a 5-year automatic renewal clause unless terminated by a written consent of both parties. During the nine months ended March 31, 2012, the Company recognized revenue of $2,833 relating to this agreement. As of March 31, 2012, the balance remaining to be recognized was $22,167.   The Company also signed a 5-year strategic agreement with National Identity Solutions (NIS) for the promotion and marketing of the Companys prepaid debit card program and NIS identity theft solutions. The agreement requires NIS to pay an up front license fee of $250,000 of which $125,000 was paid as of September 30, 2011 with the remaining balance of $125,000 paid as of December 31, 2011. Both payments have been reflected as deferred revenue to be amortized over the term of the agreement. The agreement automatically renews annually unless terminated by either party. During the nine months ended March 31, 2012, the Company recognized revenue of $22,153 relating to this agreement. As of March 31, 2012, the balance remaining to be recognized was $227,847.

I. SUBSEQUENT EVENTS   Subsequent to the quarter ended March 31, 2012, the Company borrowed a total of $4,500 from its current CEO and a board member, Van Tran, at 8% annual interest due on demand. The note is convertible into the Companys common stock at the rate of one share for every $0.08 of indebtedness.   On May 18, 2012, the Company entered into an Amended and Restated Unsecured Promissory Note with Larry Konfirst (Amended Note). The Amended Note, amends, restates and supersedes in its entirety that certain promissory note dated January 16, 2012 issued by the Company in favor of Mr. Konfirst (Original Note). Under the Amended Note, the Company is obligated to repay $500,000 to Mr. Konfirst plus simple interest at the rate of 5% per annum, accruing from the date of the Original Note, on or before January 16, 2013. The loan amount may only be used for the purpose of funding a certificate of deposit for the purpose of providing security for the Companys prepaid debit card distribution at First California Bank (or its assigns). The Amended Note is subject to the Letter Agreement by and among the Company, Larry Konfirst and two shareholders of the Company dated May 18, 2012. Pursuant to the Letter Agreement, the shareholders have confirmed their agreement to give Mr. Konfirst an option to purchase up to 1,600,000 shares of unrestricted shares of common stock of the Company at $0.40 per share, payable by cancelling monies owned by the Company under the Amended Note. In the event Mr. Konfirst exercises this option, the Company has agreed to issue a convertible note to the shareholders in an amount equal to the debt cancelled in favor of the Company. This note, if and when issued, will mature after a period of 180 days from the date of issuance, accrue simple interest at 4% per annum, and be convertible into shares of the Companys restricted common stock at a rate of $0.08 per share at the option of these shareholders.

57224

14996

31915

21939

500000

21645

29135

10168

5163

6132

4350

23281

1337

2837

599887

76381

4600

16468

604487

92849

521064

152767

2229873

2087894

811684

787799

456205

71542

474781

340628

134325

219028

4627932

3659658

1000

159201

14413010

14283077

-18596656

-18010087

604487

92849

1.00

10000000

276000 276000

1000

0.01

50000000

15920088

57224

14996

VERITEC INC

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Is Entity a Voluntary Filer? Is Entity's Reporting Status Current? Entity Filer Category Entity Public Float Entity Common Stock, Shares Outstanding Document Fiscal Period Focus Document Fiscal Year Focus Statement [Table] Statement [Line Items] Scenario [Axis] Current Assets: Cash Restricted cash Accounts receivable, net of allowance of $8,400 Note receivable Inventories Prepaid expenses Employee advances Total Current Assets Property and Equipment, net of accumulated depreciation of $218,916 and $230,784, respectively Total Assets Current Liabilities: Notes payable, net of discount of $102,224 and $0, respectively Notes payable, related party Accounts payable Deferred revenue Payroll tax liabilities Accrued expenses Total Current Liabilities Commitments and Contingencies Stockholders' Deficit Convertible preferred stock, par value $1.00; authorized 10,000,000 shares, 276,000 shares of Series H authorized, 1,000 shares issued and outstanding Common stock, par value $.01; authorized 50,000,000 shares, 15,920,088 shares issued and outstanding Additional paid-in capital Accumulated deficit Total Stockholders’ Deficit Total Liabilities and Stockholders’ Deficit Convertible preferred stock, par value Convertible preferred stock, shares authorized Convertible preferred stock, shares of Series H authorized Convertible preferred stock, shares issued Convertible preferred stock, shares outstanding Common stock, par value Common stock, shares authorized Common stock, shares issued Common stock, shares outstanding Income Statement [Abstract] License and other revenue Cost of Sales Gross Profit Operating Expenses: Selling, general and administrative Research and development Total Operating Expenses Loss from Operations Other Income (Expense) Interest Income Interest expense, including $37,324 and $36,192, respectively, to related parties Total Other Income (expense) Net Loss Loss Per Common Share, Basic and Diluted Weighted Average Number of Shares Outstanding, Basic and Diluted Beginning Balance, shares Beginning Balance, amount Fair Value of Shareholder Guarantee of Notes Payable Stock-Based Compensation Net Loss for the Period Ending Balance, shares Ending Balance, amount Statement of Cash Flows [Abstract] CASH FLOWS FROM OPERATING ACTIVITIES Net loss Adjustments to reconcile net loss to net cash used in operating activities: Depreciation Amortization of discount on notes payable Fair value of stock options issued to employees Allowance on note receivable Changes in operating assets and liabilities: Accounts receivable Restricted cash Inventories Employee advances Prepaid expenses Deferred revenue Payroll tax liabilities Accounts payables and accrued expenses Interest accrued on notes payable Net cash provided (used) by operating activities CASH FLOWS FROM INVESTING ACTIVITIES Issuance of note receivable Net cash used by investing activities CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from notes payable Net cash provided by financing activities NET INCREASE IN CASH CASH AT BEGINNING OF PERIOD CASH AT END OF PERIOD SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest NONCASH INVESTING AND FINANCING ACTIVITIES Fair value of shareholder guarantee on notes payable recorded as a valuation discount Notes to Financial Statements NATURE OF BUSINESS BASIS OF PRESENTATION GOING CONCERN SIGNIFICANT ACCOUNTING POLICIES RESTRICTED CASH NOTES PAYABLE STOCK-BASED COMPENSATION LEGAL PROCEEDINGS AGREEMENTS SUBSEQUENT EVENTS Assets, Current Assets Accrued Liabilities, Current Stockholders' Equity Attributable to Parent Liabilities and Equity Gross Profit Costs and Expenses Income (Loss) from Continuing Operations Attributable to Parent Other Expenses Shares, Issued Increase (Decrease) in Restricted Cash Increase (Decrease) in Inventories Increase (Decrease) in Employee Related Liabilities Increase (Decrease) in Prepaid Expense Deferred Revenue, Period Increase (Decrease) Increase (Decrease) in Financial Guarantee Insurance Contract Liabilities Net Cash Provided by (Used in) Operating Activities Net Cash Provided by (Used in) Investing Activities Net Cash Provided by (Used in) Financing Activities Cash and Cash Equivalents, at Carrying Value EX-101.PRE 12 vrtc-20120331_pre.xml XBRL PRESENTATION FILE XML 13 report.css IDEA: XBRL DOCUMENT /* Updated 2009-11-04 */ /* v2.2.0.24 */ /* DefRef Styles */ ..report table.authRefData{ background-color: #def; 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GOING CONCERN

3 Months Ended

Mar. 31, 2012

Notes to Financial Statements

GOING CONCERN

C. GOING CONCERN

- Definition

Disclosure of accounting policy for reporting when there is a substantial doubt about an entity's ability to continue as a going concern for a reasonable period of time (generally a year from the balance sheet date). Disclose: (a) pertinent conditions and events giving rise to the assessment of substantial doubt about the entity's ability to continue as a going concern for a reasonable period of time, (b) the possible effects of such conditions and events, (c) management's evaluation of the significance of those conditions and events and any mitigating factors, (d) possible discontinuance of operations, (e) management's plans (including relevant prospective financial information), and (f) information about the recoverability or classification of recorded asset amounts or the amounts or classification of liabilities. If management's plans alleviate the substantial doubt about the entity's ability to continue as a going concern, disclosure of the principal conditions and events that initially raised the substantial doubt about the entity's ability to continue as a going concern would be expected to be considered. Disclose whether operations for the current or prior years generated sufficient cash to cover current obligations, whether waivers were obtained from creditors relating to the company's default under the provisions of debt agreements and possible effects of such conditions and events, such as: whether there is a possible need to obtain additional financing (debt or equity) or to liquidate certain holdings to offset future cash flow deficiencies. Disclose appropriate parent company information when parent is dependent upon remittances from subsidiaries to satisfy its obligations.

+ References+ Details

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M8FQE#0I#;VYT96YT+51Y<&4Z('1E>'0O:'1M;#L@8VAA&UL;G,Z;STS1")U XML 16 R8.htm IDEA: XBRL DOCUMENT

BASIS OF PRESENTATION

3 Months Ended

Mar. 31, 2012

Notes to Financial Statements

BASIS OF PRESENTATION

B. BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements include the accounts of Veritec, VCode, and VTFS. All inter-company transactions and balances were eliminated in consolidation.

XML 17 R2.htm IDEA: XBRL DOCUMENT

CONDENSED CONSOLIDATED BALANCE SHEETS (USD $)	Jun. 30, 2012	Mar. 31, 2012
Current Assets:
Cash	$ 14,996
Restricted cash
Accounts receivable, net of allowance of $8,400	29,135
Note receivable
Inventories	6,132
Prepaid expenses	23,281
Employee advances	2,837
Total Current Assets	76,381
Property and Equipment, net of accumulated depreciation of $218,916 and $230,784, respectively	16,468
Total Assets	92,849
Current Liabilities:
Notes payable, net of discount of $102,224 and $0, respectively	152,767
Notes payable, related party	2,087,894
Accounts payable	787,799
Deferred revenue	71,542
Payroll tax liabilities	340,628
Accrued expenses	219,028
Total Current Liabilities	3,659,658
Stockholders' Deficit
Convertible preferred stock, par value $1.00; authorized 10,000,000 shares, 276,000 shares of Series H authorized, 1,000 shares issued and outstanding	1,000
Common stock, par value $.01; authorized 50,000,000 shares, 15,920,088 shares issued and outstanding	159,201
Additional paid-in capital	14,283,077
Accumulated deficit	(18,010,087)
Total Stockholders’ Deficit	(3,566,809)	(4,023,445)
Total Liabilities and Stockholders’ Deficit	92,849
Unaudited
Current Assets:
Cash		57,224
Restricted cash		500,000
Accounts receivable, net of allowance of $8,400		21,645
Note receivable		10,168
Inventories		5,163
Prepaid expenses		4,350
Employee advances		1,337
Total Current Assets		599,887
Property and Equipment, net of accumulated depreciation of $218,916 and $230,784, respectively		4,600
Total Assets		604,487
Current Liabilities:
Notes payable, net of discount of $102,224 and $0, respectively		521,064
Notes payable, related party		2,229,873
Accounts payable		811,684
Deferred revenue		456,205
Payroll tax liabilities		474,781
Accrued expenses		134,325
Total Current Liabilities		4,627,932
Stockholders' Deficit
Convertible preferred stock, par value $1.00; authorized 10,000,000 shares, 276,000 shares of Series H authorized, 1,000 shares issued and outstanding		1,000
Common stock, par value $.01; authorized 50,000,000 shares, 15,920,088 shares issued and outstanding		159,201
Additional paid-in capital		14,413,010
Accumulated deficit		(18,596,656)
Total Liabilities and Stockholders’ Deficit		$ 604,487

XML 18 R6.htm IDEA: XBRL DOCUMENT

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (USD $)	9 Months Ended
	Mar. 31, 2012	Mar. 31, 2011
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$ (586,569)	$ (768,908)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation	11,868	21,458
Amortization of discount on notes payable	27,707	7,312
Fair value of stock options issued to employees	2	1,208
Allowance on note receivable		60,000
Changes in operating assets and liabilities:
Accounts receivable	7,490	50,732
Restricted cash	(500,000)
Inventories	969	(2,923)
Employee advances	1,500	2,000
Prepaid expenses	18,931	(125)
Deferred revenue	384,663	59,419
Payroll tax liabilities	134,153	145,403
Accounts payables and accrued expenses	(60,818)	229,004
Interest accrued on notes payable	123,000	116,244
Net cash provided (used) by operating activities	(437,104)	(79,176)
CASH FLOWS FROM INVESTING ACTIVITIES
Issuance of note receivable	(10,168)	(60,000)
Net cash used by investing activities	(10,168)	(60,000)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable	489,500	129,200
Net cash provided by financing activities	489,500	129,200
NET INCREASE IN CASH	42,228	(9,976)
CASH AT BEGINNING OF PERIOD	14,996	31,915
CASH AT END OF PERIOD	57,224	21,939
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest	1,967	606
NONCASH INVESTING AND FINANCING ACTIVITIES
Fair value of shareholder guarantee on notes payable recorded as a valuation discount	$ 129,931

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NATURE OF BUSINESS

3 Months Ended

Mar. 31, 2012

Notes to Financial Statements

NATURE OF BUSINESS

A. NATURE OF BUSINESS

The Company has a portfolio of five United States and eight foreign patents. In addition, we have seven U.S. and twenty-eight foreign pending patent applications.

XML 21 R3.htm IDEA: XBRL DOCUMENT

CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $)	Jun. 30, 2012	Mar. 31, 2012 Unaudited
Convertible preferred stock, par value	$ 1.00	$ 1.00
Convertible preferred stock, shares authorized	10,000,000	10,000,000
Convertible preferred stock, shares of Series H authorized	276,000	276,000
Convertible preferred stock, shares issued	1,000	1,000
Convertible preferred stock, shares outstanding	1,000	1,000
Common stock, par value	$ 0.01	$ 0.01
Common stock, shares authorized	50,000,000	50,000,000
Common stock, shares issued	15,920,088	15,920,088
Common stock, shares outstanding	15,920,088	15,920,088

- Definition

Number of shares of common stock outstanding. Common stock represent the ownership interest in a corporation.

+ References+ Details

XML 22 R1.htm IDEA: XBRL DOCUMENT

Document and Entity Information	3 Months Ended
Document and Entity Information	Mar. 31, 2012
Document And Entity Information
Entity Registrant Name	VERITEC INC
Entity Central Index Key	0000773318
Document Type	10-Q
Document Period End Date	Mar. 31, 2012
Amendment Flag	false
Current Fiscal Year End Date	--06-30
Is Entity a Well-known Seasoned Issuer?	No
Is Entity a Voluntary Filer?	No
Is Entity's Reporting Status Current?	Yes
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding	15,920,088
Document Fiscal Period Focus	Q3
Document Fiscal Year Focus	2012

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (USD $)
3 Months Ended 9 Months Ended

Mar. 31, 2012

Mar. 31, 2011

Mar. 31, 2012

Mar. 31, 2011

Income Statement [Abstract]

License and other revenue $ 184,358 $ 212,851 $ 452,416 $ 678,919

Cost of Sales 74,298 83,714 188,415 260,468

Gross Profit 110,060 129,137 264,001 418,451

Operating Expenses:

Selling, general and administrative 203,431 274,596 535,320 883,033

Research and development 55,896 38,896 162,686 183,720

Total Operating Expenses 259,327 313,492 698,006 1,066,753

Loss from Operations (149,267) (184,355) (434,005) (648,302)

Other Income (Expense)

Interest Income 106 110

Interest expense, including $37,324 and $36,192, respectively, to related parties (71,728) (39,041) (152,674) (120,606)

Total Other Income (expense) (71,622) (39,041) (152,564) (120,606)

Net Loss $ (220,889) $ (223,396) $ (586,569) $ (768,908)

Loss Per Common Share, Basic and Diluted $ (0.01) $ (0.01) $ (0.04) $ (0.04)

Weighted Average Number of Shares Outstanding, Basic and Diluted 15,920,088 15,920,088 15,920,088 15,920,088

X

- Definition

The aggregate costs related to goods produced and sold and services rendered by an entity during the reporting period. This excludes costs incurred during the reporting period related to financial services rendered and other revenue generating activities.

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Reference 1: http://www.xbrl.org/2003/role/presentationRef

-Publisher SEC

-Name Regulation S-X (SX)

-Number 210

-Section 03

-Paragraph 2

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-Name Accounting Standards Codification

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-SubTopic 10

-Section S99

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X

- Definition

Total costs of sales and operating expenses for the period.

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Reference 1: http://www.xbrl.org/2003/role/presentationRef

-Publisher FASB

-Name Accounting Standards Codification

-Topic 225

-SubTopic 10

-Section S99

-Paragraph 2

-Subparagraph (SX 210.5-03)

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NOTES PAYABLE
3 Months Ended

Mar. 31, 2012

Notes to Financial Statements

NOTES PAYABLE

F. NOTES PAYABLE

Notes payable consist of the following:

March 31, 2012 June 30, 2011

(UNAUDITED)

Convertible notes payable (includes $122,926 and $116,899, respectively, to non-related parties), unsecured, interest at 8%, due September 2010 through November 2010. The principal and accrued interest are convertible at a conversion price of $0.30. The principal and interest is due immediately on the event of default or change of control. The holders also received warrants to purchase one share of common stock for every $2 of investment. The Company recorded a $20,981 discount on the notes payable for the value of the warrants issued. The discount was fully amortized over the term of the notes payable. There was no unamortized discount as of March 31, 2012 and June 30, 2011, respectively. The notes are now in default. $ 684,845 $ 651,629

Convertible notes payable to related parties, unsecured, principal and interest are convertible into common stock at $0.08 to $0.33 per share, interest at 8 % to 10%, due July to November 2010. The notes are now in default. 840,463 766,914

Convertible note payable to related party, secured by the Company’s intellectual property, principal and interest are convertible into common stock at $0.25 per share subject to board of directors’ approval, interest at 8%. The note was due November 2010 and is now in default. 238,882 226,828

Note payable to related party, secured by the Company’s intellectual property, interest at 8% due August 2010 and is now is default. 464,174 441,014

Notes payable to related parties, unsecured, interest at 0% to 8%, due on demand. 124,436 118,408

Note payable, unsecured, interest at 10%, due January 2010 and is now in default. 24,669 23,162

Convertible note payable, unsecured, principal and interest are convertible into common stock at $0.30 per share subject to board of directors’ approval, interest at 8%, due January 2011 and is now in default. 11,786 11,183

Notes payable, unsecured, interest at 5%, due January 2013.(1) 452,349 —

Convertible note payable, unsecured, principal and interest are convertible into common stock at $0.40 per share, interest at 5%, due March 2013. 10,034 —

Convertible note payable, unsecured, principal and interest are convertible into common stock at $1.00 per share subject to board of directors’ approval, interest at 8% due November 2009 and is now in default. 1,523 1,523

Total 2,853,161 2,240,661

Less valuation discount on note payable (102,224 ) —

Grand total $ 2,750,937 $ 2,240,661

(1) In connection with the issuance of the notes payable, two stockholders of the Company granted the lender the option to acquire 1,600,000 unrestricted shares of the Company’s common stock from the stockholder’s at a price of $0.40 per share. The agreement to provide the lender with the option to purchase shares of the two shareholders was presumed to be a separate arrangement between the Company and the lender. As such, the Company valued the shares as if they had provided the lender an option to acquire these shares. The aggregate value of the 1,600,000 shares was valued at $129,931 using Black-Scholes option valuation model. The value of the option is being considered as a valuation discount and will be amortized over the one year life of the Note. For the period ended March 31, 2012, the Company recognized $27,707 of expense related to the amortization of this discount and is included in the interest expense in the condensed consolidated statement of operations. The remaining valuation discount on note payable of $102,224 at March 31, 2012 is reflected as a valuation discount and offset to notes payable in the condensed consolidated balance sheets.

For the purposes of Balance Sheet presentation notes payable have been grouped as follows:

March 31, June 30,

2012 2011

Notes payable, net of discount of $102,224 and $0, respectively $ 521,064 $ 152,767

Notes payable, related party 2,229,873 2,087,894

$ 2,750,937 $ 2,240,661

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RESTRICTED CASH
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Notes to Financial Statements

RESTRICTED CASH

E. RESTRICTED CASH

The Company entered into a Store Value Prepaid Card Sponsorship Agreement (the “Agreement”) with a Bank. Whereas the Company has developed for marketing and management purposes, store value prepaid card programs (the “Programs”) which will be marketed and managed daily at the direction of the Bank. In connection with the agreement with the Bank, the Company established a Reserve Account controlled by the bank in the amount of $500,000. Since this amount is restricted for the purposes related to the Programs, it is classified as restricted cash on the condensed consolidated balance sheets.

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AGREEMENTS
3 Months Ended

Mar. 31, 2012

Notes to Financial Statements

AGREEMENTS

H. AGREEMENTS

During the quarter ended September 30, 2011, the Company signed a 5-year agreement with Antero Payment Solutions for the use of each others’ technologies among other things and to promote and market each others’ prepaid debit card programs. Under the terms of the agreement the Company received $25,000 as an up front license fee, which the Company has reflected as deferred revenue to be amortized over the term of the agreement. The agreement has a 5-year automatic renewal clause unless terminated by a written consent of both parties. During the nine months ended March 31, 2012, the Company recognized revenue of $2,833 relating to this agreement. As of March 31, 2012, the balance remaining to be recognized was $22,167.

The Company also signed a 5-year strategic agreement with National Identity Solutions (NIS) for the promotion and marketing of the Company’s prepaid debit card program and NIS’ identity theft solutions. The agreement requires NIS to pay an up front license fee of $250,000 of which $125,000 was paid as of September 30, 2011 with the remaining balance of $125,000 paid as of December 31, 2011. Both payments have been reflected as deferred revenue to be amortized over the term of the agreement. The agreement automatically renews annually unless terminated by either party. During the nine months ended March 31, 2012, the Company recognized revenue of $22,153 relating to this agreement. As of March 31, 2012, the balance remaining to be recognized was $227,847.

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-Number 210

-Section 03

-Paragraph 17

-Article 9

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-Name Accounting Standards Codification

-Topic 942

-SubTopic 210

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-Subparagraph (SX 210.9-03.17)

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STOCK-BASED COMPENSATION
3 Months Ended

Mar. 31, 2012

Notes to Financial Statements

STOCK-BASED COMPENSATION

F. STOCK-BASED COMPENSATION

Stock options

The Company has agreements with certain of its employees and independent contractor consultants that provide grants of options to purchase the Company’s common stock.

A summary of stock options as of March 31, 2012 is as follows:

Number of Weighted - Average

Shares Exercise Price

Outstanding at June 30, 2011 824,249 $0.47

Expired (40,000) $0.25

Outstanding at March 31, 2012 784,249 $0.48

Exercisable at March 31, 2012 784,249 $0.48

The weighted-average remaining contractual life of stock options outstanding and exercisable at March 31, 2012 is 2.2 years. The aggregate intrinsic value of stock options outstanding as of March 31, 2012 was $1,800.

The weighted-average fair value of options granted for the nine months ended March 31, 2012 and 2011 was $0.00 and $0.14, respectively.

Stock-based compensation expense was $0 and $338 during the three months ended March 31, 2012 and 2011, respectively. Stock based compensation expense was $2 and $1,208 during the nine months ended March 31, 2012 and 2011, respectively. As of March 31, 2012, there was no unrecognized compensation costs related to stock options.

Warrants

In connection with the issuance of certain convertible notes payable, the Company has outstanding 275,000 fully vested warrants to acquire its common stock at an exercise price of $2 per share. The warrants expire in 2014. The warrants have no intrinsic value at March 31, 2012.

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LEGAL PROCEEDINGS
3 Months Ended

Mar. 31, 2012

Notes to Financial Statements

LEGAL PROCEEDINGS

G. LEGAL PROCEEDINGS

On February 15, 2011, the Company filed a complaint in U.S. District Court for the District of Minnesota against Aurora Financial Systems, Inc. (“Aurora”) for declaratory judgment, tortious interference and other related claims concerning assertions by Aurora regarding United States Patent No. 7,229,006. The complaint related to Aurora’s improper and unlawful assertions of patent against certain software owned by the Company which was lawfully acquired from the software’s owner and inventor before the purported assignment of any patent rights to Aurora. Even though Aurora was aware of the lawful acquisition yet they have made repeated claims about the Company’s purported patent infringement relating to the Company’s use and licensing of the software to various financial institutions with which the Company has sought business relationship. The Company is seeking a declaration of non-infringement based on legal estoppel and implied license as well as a judgment that Aurora has committed tortious interference with prospective economic advantage, false advertising under the Lanham Act and has violated Minnesota’s Deceptive Trade Practices Act. As of March 31, 2012 the case has been in discovery and Aurora has not countersued. On May 4, 2012 the case was dismissed with prejudice with each party bearing its own fees and costs. In addition to the preceding lawsuit, the Company is subject to various legal proceedings from time to time in the ordinary course of business, none of which is required to be disclosed.

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SUBSEQUENT EVENTS
3 Months Ended

Mar. 31, 2012

Notes to Financial Statements

SUBSEQUENT EVENTS

I. SUBSEQUENT EVENTS

Subsequent to the quarter ended March 31, 2012, the Company borrowed a total of $4,500 from its current CEO and a board member, Van Tran, at 8% annual interest due on demand. The note is convertible into the Company’s common stock at the rate of one share for every $0.08 of indebtedness.

On May 18, 2012, the Company entered into an Amended and Restated Unsecured Promissory Note with Larry Konfirst (“Amended Note”). The Amended Note, amends, restates and supersedes in its entirety that certain promissory note dated January 16, 2012 issued by the Company in favor of Mr. Konfirst (“Original Note”). Under the Amended Note, the Company is obligated to repay $500,000 to Mr. Konfirst plus simple interest at the rate of 5% per annum, accruing from the date of the Original Note, on or before January 16, 2013. The loan amount may only be used for the purpose of funding a certificate of deposit for the purpose of providing security for the Company’s prepaid debit card distribution at First California Bank (or its assigns). The Amended Note is subject to the Letter Agreement by and among the Company, Larry Konfirst and two shareholders of the Company dated May 18, 2012. Pursuant to the Letter Agreement, the shareholders have confirmed their agreement to give Mr. Konfirst an option to purchase up to 1,600,000 shares of unrestricted shares of common stock of the Company at $0.40 per share, payable by cancelling monies owned by the Company under the Amended Note. In the event Mr. Konfirst exercises this option, the Company has agreed to issue a convertible note to the shareholders in an amount equal to the debt cancelled in favor of the Company. This note, if and when issued, will mature after a period of 180 days from the date of issuance, accrue simple interest at 4% per annum, and be convertible into shares of the Company’s restricted common stock at a rate of $0.08 per share at the option of these shareholders.

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CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT (Unaudited) (USD $)

Preferred Stock Shares

Preferred Stock Amount

Common Stock Shares

Common Stock Amount

Additional Paid-In Capital

Accumulated Deficit

Total

Beginning Balance, amount at Jun. 30, 2011 $ 1,000 $ 159,201 $ 14,283,077 $ (18,010,087)

Beginning Balance, shares at Jun. 30, 2011 1,000 15,920,088

Fair Value of Shareholder Guarantee of Notes Payable 129,931 129,931

Stock-Based Compensation 2 2

Net Loss for the Period (586,569) (586,569)

Ending Balance, amount at Mar. 31, 2012 $ 1,000 $ 159,201 $ 14,413,010 $ (18,596,656) $ (4,023,445)

Ending Balance, shares at Mar. 31, 2012 1,000 15,920,088

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-Name Accounting Standards Codification

-Topic 260

-SubTopic 10

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-Number 95

-Paragraph 28

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-Topic 230

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-Topic 210

-SubTopic 10

-Section S99

-Paragraph 1

-Subparagraph (SX 210.5-02.29-31)

-URI http://asc.fasb.org/extlink&oid=6877327&loc=d3e13212-122682

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-Name Regulation S-X (SX)

-Number 210

-Section 02

-Paragraph 29, 30, 31

-Article 5

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-Name Accounting Research Bulletin (ARB)

-Number 51

-Paragraph A3

-Appendix A

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-Name Accounting Standards Codification

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SIGNIFICANT ACCOUNTING POLICIES
3 Months Ended

Mar. 31, 2012

Notes to Financial Statements

SIGNIFICANT ACCOUNTING POLICIES

D. SIGNIFICANT ACCOUNTING POLICIES

Net Loss per Common Share:

Basic earnings (loss) per share is 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 anti dilutive.

For the three and nine months ended March 31, 2012 and 2011 the calculations of basic and diluted loss per share are the same because potential dilutive securities would have an anti-dilutive effect.

There were 7,141,067 and 6,547,987 potentially dilutive securities as of March 31, 2012 and 2011, respectively.

Concentrations

During the three months ended March 31, 2012 and 2011, the Company had one customer that accounted for approximately 15% of sales in 2012, and four customers of which two customers accounted for approximately 13% each with the remaining two accounting for approximately 15% and 38% of sales in 2011, respectively. During the nine months ended March 31, 2012 and

2011, the Company had two customers that accounted for approximately 11% and 24% of sales in 2012, and four customers that accounted for approximately 12%, 13%, 16%, and 29% of sales in 2011, respectively. No other customers accounted for more than 10% of sales in either period. As of March 31, 2012 and June 30, 2011, the Company had approximately $14,025 (46%) and $6,050 (20%) and $4,125 (14%) and $6,050 (16%), $10,963 (29%), $10,025 (27%), and $5,300 (14%), respectively, of accounts receivable from its major customers.

For the three months ended March 31, 2012 and 2011, foreign revenues accounted for 30% (22% Korea and 8% Taiwan) and 87% (72% Korea and 15% Taiwan) of the Company’s total revenues respectively. For the nine months ended March 31, 2012 and 2011, foreign revenues accounted for 47% (40% Korea and 7% Taiwan) and 93% (72% Korea, 19% Taiwan, and 2% others) of the Company’s revenues respectively.

Recent Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”. ASU No. 2011-4 does not require additional fair value measurements and is not intended to establish valuation standards or affect valuation practices outside of financial reporting. The ASU is effective for interim and annual periods beginning after December 15, 2011. The Company will adopt the ASU as required. The ASU will affect the Company’s fair value disclosures, but will not affect the Company’s results of operations, financial condition or liquidity.

In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income”. The ASU eliminates the option to present the components of other comprehensive income as part of the statement of changes in shareholders’ equity, and instead requires consecutive presentation of the statement of net income and other comprehensive income either in a continuous statement of comprehensive income or in two separate but consecutive statements. ASU No. 2011-5 is effective for interim and annual periods beginning after December 15, 2011. The Company will adopt the ASU as required. It will have no affect on the Company’s results of operations, financial condition or liquidity.

In September 2011, the FASB issued ASU 2011-08, “Testing Goodwill for Impairment”, an update to existing guidance on the assessment of goodwill impairment. This update simplifies the assessment of goodwill for impairment by allowing companies to consider qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount before performing the two step impairment review process. It also amends the examples of events or circumstances that would be considered in a goodwill impairment evaluation. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The Company is currently evaluating the affects adoption of ASU 2011-08 may have on its goodwill impairment testing.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the Securities Exchange Commission (the "SEC") did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements.

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CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT (Unaudited) (USD $)	Preferred Stock Shares	Preferred Stock Amount	Common Stock Shares	Common Stock Amount	Additional Paid-In Capital	Accumulated Deficit	Total
Beginning Balance, amount at Jun. 30, 2011		$ 1,000		$ 159,201	$ 14,283,077	$ (18,010,087)
Beginning Balance, shares at Jun. 30, 2011	1,000		15,920,088
Fair Value of Shareholder Guarantee of Notes Payable					129,931		129,931
Stock-Based Compensation					2		2
Net Loss for the Period						(586,569)	(586,569)
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