VRTC Veritec Inc (PK)

VERITEC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

VERITEC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE FISCAL YEARS ENDED JUNE 30, 2018 AND 2017

NOTE 1 - OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company

Veritec, Inc. (Veritec) was formed in the State of Nevada on September 8, 1982.

Veritec is primarily engaged in the development, sales, and licensing of products and providing services related to its mobile banking solutions.

As a Cardholder Independent Sales Organization, Veritec is able to promote and sell Visa branded card programs. As a Third-Party Servicer, Veritec provides back-end cardholder transaction processing services for Visa branded card programs on behalf of its sponsoring bank. Veritec 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. Veritec has had agreements with various banks, including Security First Bank (terminated in 2010), Palm Desert National Bank (which was later assigned to First California Bank and subsequently Pacific Western Bank that terminated in 2013), and Central Bank of Kansas City (terminated in 2016). Veritec is currently seeking a bank to sponsor its Prepaid Card programs.

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Intercompany transactions and balances were eliminated in consolidation. Veritec’s wholly owned subsidiaries include Veritec Financial Systems, Inc., Tangible Payment Systems, Inc., and Public Bell, Inc. (collectively the “Company”).

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Those estimates and assumptions include estimates for reserves of uncollectible accounts, analysis of impairments of long lived assets, accruals for potential liabilities, assumptions made in valuing stock instruments issued for services, and valuation of deferred tax assets. Actual results could differ from those estimates.

Cash and cash equivalents

Investments with original maturities of three months or less are considered to be cash equivalents.

Accounts Receivable

The Company sells to domestic and foreign companies and grants uncollateralized credit to customers, but requires deposits on unique orders. Management periodically reviews its accounts receivable and provides an allowance for doubtful accounts after analyzing the age of the receivable, payment history and prior experience with the customer. The estimated loss that management believes is probable is included in the allowance for doubtful accounts. While the ultimate loss may differ, management believes that any additional loss will not have a material impact on the Company's financial position. Due to uncertainties in the settlement process, however, it is at least reasonably possible that management's estimate will change during the near term. Based on management’s assessment, no allowance for doubtful accounts was considered necessary at June 30, 2018 or 2017.

Revenue Recognition

Revenues for the Company are classified into mobile banking technology and management fee revenue.

a. Mobile Banking Revenue

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

The Company has entered into certain long term agreements to provide application development and support. Some customers paid the agreement in full at signing and the Company recorded the receipt of payment as deferred revenue. The Company records revenue relating to these agreements on a pro-rata basis over the term of the agreement and reduces its deferred revenue balance accordingly.

b. Management Fee Revenue

On September 30, 2015, the Company sold all of its assets of its Barcode Technology, which was comprised solely of its intellectual property, to The Matthews Group (a related party, see Note 9). The Company subsequently entered into a management services agreement with The Matthews Group to manage all facets of the barcode technology operations through June 30, 2019. The Company earned a fee of 20% of all revenues billed from the barcode technology operations up to May 31, 2017, and now earns a fee of 35% of all revenues billed up to June 30, 2019.

Derivative Financial Instruments

The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of operations. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within twelve (12) months of the balance sheet date.

Income Taxes

The Company accounts for income taxes using the asset and liability method whereby deferred tax assets are recognized for deductible temporary differences, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

Research and Development

Research and development costs are expensed as incurred.

Loss per Common Share

Basic earnings (loss) per share are computed by dividing the net income (loss) applicable to Common Stockholders by the weighted average number of shares of Common Stock outstanding during the year. Diluted earnings (loss) per share is computed by dividing the net income (loss) applicable to Common Stockholders by the weighted average number of common stock outstanding plus the number of additional common stock that would have been outstanding if all dilutive potential common stock had been issued, using the treasury stock method. Potential common stock are excluded from the computation as their effect is antidilutive.

For the years ended June 30, 2018 and 2017, the calculations of basic and diluted loss per share are the same because potential dilutive securities would have an anti-dilutive effect.

As of June 30, 2018 and 2017, we excluded the outstanding securities summarized below, which entitle the holders thereof to acquire shares of common stock, from our calculation of earnings per share, as their effect would have been anti-dilutive.

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.  The Company accounts for stock option and stock warrant grants to employees based on the authoritative guidance provided by the Financial Accounting Standards Board (FASB) where the value of the award is measured on the date of grant and recognized over the vesting period. The Company accounts for stock option and stock warrant grants to non-employees in accordance with the authoritative guidance of the FASB where the value of the stock compensation is determined based upon the measurement date 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. Non-employee stock-based compensation charges generally are amortized over the vesting period on a straight-line basis. In certain circumstances where there are no future performance requirements by the non-employee, option or warrant grants are immediately vested and the total stock-based compensation charge is recorded in the period of the measurement date.

The fair value of the Company’s common stock option and warrant grants are estimated using a Black-Scholes option pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the common stock options, and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes option pricing model, and based on actual experience. The assumptions used in the Black-Scholes option pricing model could materially affect compensation expense recorded in future periods.

Fair Value of Financial Instruments

The Company determines the fair value of its assets and liabilities based on the exchange price in U.S. dollars that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The Company uses a fair value hierarchy with three levels of inputs, of which the first two are considered observable and the last unobservable, to measure fair value:

The carrying amounts of financial instruments such as cash, accounts receivable, inventories, and accounts payable and accrued liabilities, approximate the related fair values due to the short-term maturities of these instruments.

The fair value of the derivative liabilities of $728,000 at June 30, 2017, was valued using Level 2 inputs.

Concentrations

During the year ended June 30, 2018, the Company had one customer, a related party that represented 76% of our revenues. No other customer represented more than 10% of our revenues.

During the year ended June 30, 2017, the Company had one customer, a related party, that represented 53% of our revenues and one customer that represented 14% of our revenues. No other customer represented more than 10% of our revenues.

During the years ended June 30, 2018 and 2017, the Company had no foreign revenues.

Segments

The Company operates in one segment, the mobile financial banking industry. In accordance with the “Segment Reporting” Topic of the ASC, the Company’s chief operating decision maker has been identified as the Chief Executive Officer and President, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. Existing guidance, which is based on a management approach to segment reporting, establishes requirements to report selected segment information quarterly and to report annually entity-wide disclosures about products and services, major customers, and the countries in which the entity holds material assets and reports revenue. All material operating units qualify for aggregation under “Segment Reporting” due to their similar customer base and similarities in: economic characteristics; nature of products and services; and procurement, manufacturing and distribution processes. Since the Company operates in one segment, all financial information required by “Segment Reporting” can be found in the accompanying consolidated financial statements

Recently Issued Accounting Standards

In May 2014, the Financial Accounting Standards Board (“FASB”) issued guidance creating Accounting Standards Codification (“ASC”) Section 606, “ Revenue from Contracts with Customers. ” ASC 606 creates a five-step model that requires entities to exercise judgment when considering the terms of contract(s), which includes (1) identifying the contract(s) or agreement(s) with a customer, (2) identifying our performance obligations in the contract or agreement, (3) determining the transaction price, (4) allocating the transaction price to the separate performance obligations, and (5) recognizing revenue as each performance obligation is satisfied. Under ASC 606, revenue is recognized when performance obligations under the terms of a contract are satisfied, which occurs for the company upon shipment or delivery to our customers based on written sales terms, which is also when control is transferred. Revenue is measured as the amount of consideration we expect to receive in exchange for transferring products or services to a customer. The updated guidance is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within that year. The Company will adopt this guidance effective July 1, 2018 using the modified retrospective method applied to all contracts not completed as of July 1, 2018. Due to the nature of the products sold by the Company, the adoption of the new standard will have no quantitative effect on the Company’s financial statements.

In February 2016, the FASB issued ASU No. 2016-02, Leases . ASU 2016-02 requires a lessee to record a right of use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months. ASU 2016-02 is effective for all interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is in the process of evaluating the impact of ASU 2016-02 on the Company’s financial statements and disclosures.

Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future consolidated financial statements.

NOTE 2 - GOING CONCERN

The accompanying Consolidated Financial Statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. During the year ended June 30, 2018, the Company recorded a loss of $18,210, used cash in operating activities of $506,919, and at June 30, 2018, the Company had a stockholders’ deficiency of $4,461,189. In addition, as of June 30, 2018, the Company is delinquent in payment of $761,315 of its notes payable. These factors, among others, raise substantial doubt about our ability to continue as a going concern within one year of the date that the financial statements are issued. In addition, the Company’s independent registered public accounting firm, in its report on our June 30, 2018 financial statements, has raised substantial doubt about the Company’s ability to continue as a going concern. The Company’s financial statements do not include any adjustments that might result from the outcome of this uncertainty be necessary should we be unable to continue as a going concern.

The Company believes it will require additional funds to continue its operations through fiscal 2019 and to continue to develop its existing projects and plans to raise such funds by finding additional investors to purchase the Company’s securities, generating sufficient sales revenue, implementing dramatic cost reductions or any combination thereof. There is no assurance that the Company can be successful in raising such funds, generating the necessary sales or reducing major costs. Further, if the Company is successful in raising such funds from sales of equity securities, the terms of these sales may cause significant dilution to existing holders of common stock. The consolidated financial statements do not include any adjustments that may result from this uncertainty.

NOTE 3 – INTANGIBLE ASSETS AND CONTINGENT EARNOUT LIABILITY

On September 30, 2014, the Company and Tangible Payments LLC, a Maryland Limited Liability Company, entered into an Asset Purchase Agreement pursuant to which the Company acquired certain assets and liabilities of the Tangible Payments LLC. Tangible Payments LLC developed online payment technology that encrypts sensitive information securely between customers and merchants during online transactions.

The purchase price for the acquisition was comprised of 250,000 shares of restricted common stock of Veritec valued at $37,500, issued on closing, and an earnout payment of $155,000 for an aggregate purchase price of $192,500. The earnout payment is payable on a monthly basis from the net profits derived from the acquired assets commencing three months after the closing. The earnout payment is accelerated and the balance of the earnout payment shall be due in full at such time as Veritec receives equity investments aggregating $1,300,000. For the years ended June 30, 2018 and 2017, there was no net profit derived from the acquired assets and accordingly, no payments were made on the earnout.

The Company assigned $192,500 of the purchase price to contract commitments which were amortized over a three year period. For the years ended June 30, 2018 and 2017, the Company recorded $16,042 and $64,166 of amortization expense related to this intangible which is included in general and administrative expense in the Consolidated Statements of Operations. As of June 30, 2018, there was no remaining unrecognized amortization expense related to intangible assets.

NOTE 4 – CONVERTIBLE NOTES AND NOTES PAYABLE

Convertible notes and notes payable-in default

Notes payable includes principal and accrued interest and consists of the following at June 30, 2018 and June 30, 2017:

(a) The notes are unsecured, convertible into common stock at amounts ranging from $0.08 to $0.30 per share, bear interest at rates ranging from 5% to 8% per annum, were due through 2011 and are in default or due on demand.

At June 30, 2016, convertible notes totaled $195,655. During the year ended June 30, 2017, interest of $9,460 was added to principal, leaving a balance owed of $205,116 at June 30, 2017. During the year ended June 30, 2018, interest of $9,461 was added to principal leaving a balance owed of $214,576 at June 30, 2018. At June 30, 2018, $176,506 of the convertible notes were in default, and convertible at a conversion price of $0.30 per share into 588,354 shares of the Company’s common stock. Certain of the amounts due are subject to a legal proceeding (see Note 10). The balance of $38,070 is due on demand and convertible at a conversion price of $0.08 per share into 475,875 shares of the Company’s common stock.

(b) The notes are either secured by the Company’s intellectual property or unsecured and bear interest ranging from 6.5% to 10% per annum, were due in 2012, and are in default.

At June 30, 2016, the notes totaled $352,729 and during the year ended June 30, 2017, interest of $17,478 was added to principal, leaving a balance owed of $370,207 at June 30, 2017. During the year ended June 30, 2018, interest of $17,477 was added to principal leaving a balance owed of $387,684 at June 30, 2018. At June 30, 2018, $351,901 of notes are secured by the Company’s intellectual property and $35,783 of notes are unsecured.

Convertible notes and notes payable-related party

Notes payable-related party includes principal and accrued interest and consists of the following at June 30, 2018 and June 30, 2017:

(a) The notes are unsecured, convertible into common stock at $0.08 per share, bear interest at rates ranging from 8% to 10% per annum, and are due on demand.

The Matthews Group is a related party (see Note 9) and is owned 50% by Ms. Van Tran, the Company’s CEO, and 50% by Larry Johanns, a significant shareholder of the Company. At June 30, 2016, convertible notes due to The Matthews Group totaled $669,648. During the year ended June 30, 2017, $477,500 of convertible notes were issued and interest of $89,795 was added to principal leaving a balance payable of $1,236,943 at June 30, 2017. The Company determined that upon issuance of certain convertible notes issued in the second quarter of fiscal 2017, there become insufficient authorized shares of common stock available for conversion. Accordingly, the fair value of the conversion features for these convertible notes were recorded as derivative liabilities with a corresponding discount to the related notes. The Company determined the fair value of the conversion features were $182,000 (see Note 5). As the convertible notes are due on demand, the $182,000 discount was expensed upon issuance. During the year ended June 30, 2018, interest of $107,839 was added to principal leaving a balance payable of $1,344,782 at June 30, 2018. At June 30, 2018, the notes are convertible at a conversion price of $0.08 per share into 16,809,779 shares of the Company’s common stock.

(b) The notes are unsecured, accrue interest at 10% per annum, and are due on demand. The notes were issued relating to a management services agreement with The Matthews Group (see Note 9) dated September 30, 2015. At June 30, 2016, notes due to The Matthews Group totaled $216,648. During the year ended June 30, 2017, $538,820 of notes payable were issued and interest of $49,727 was added to principal leaving a balance owed of $805,195. During the year ended June 30, 2018, $599,312 of notes payable were issued, interest of $104,581was added to principal, and an interest payment of $125,000 was made, leaving a balance owed of $1,384,088 at June 30, 2018.

(c) The notes are due to a current and a former director, are unsecured, convertible into common stock at per share amounts ranging from $0.10 to $0.30, and bear interest at rates ranging from 8% to 10% per annum.

At June 30, 2016, convertible notes due other related parties totaled $237,725. During the year ended June 30, 2017, interest of $14,003 was added to principal leaving a balance owed of $251,728 at June 30, 2017. During the year ended June 30, 2018, interest of $14,001 was added to principal leaving a balance owed of $265,729 at June 30, 2018. At June 30, 2018, $197,124 of the notes were due in 2010 and are in default, and the balance of $68,605 is due on demand. At June 30, 2018, $197,124 of the notes are convertible at a conversion price of $0.30 per share into 657,080 shares of the Company’s common stock, $20,581 of the notes are convertible at a conversion price of $0.10 per share into 205,810 shares of the Company’s common stock, and $48,024 of the notes are convertible at a conversion price of $0.08 per share into 600,289 shares of the Company’s common stock.

NOTE 5 - DERIVATIVE LIABILITIES

During fiscal 2017, the Company determined there were insufficient authorized shares of common stock available for conversion of certain of its convertible notes issued in the second quarter of fiscal 2017 (See Note 4) and therefore the conversion feature of the notes did not meet equity classification. Based on this, the Company recorded derivative liabilities of $182,000 upon the issuance of these convertible notes. Subsequent to this recording and through June 30, 2017, the Company recorded a change in the fair value of the derivative liabilities of $546,000. At June 30, 2017, total derivative liabilities were $728,000. On April 18, 2018, the Company increased its authorized shares from 50,000,000 to 150,000,000 shares and therefore, the Company determined it had sufficient authorized shares available to meet equity classification for the conversion features of its convertible notes. Accordingly, on April 14, 2018, the Company remeasured the derivative liabilities to their fair value of $125,000, and recorded a gain in fair value of the derivative of $603,000. The balance of the derivative of $125,000 was then reclassified to equity and recorded as a credit to additional paid-in capital in accordance with ASC 815-15-35-4.

The derivative liability was valued at the following dates using a Black-Scholes-Merton model with the following assumptions:

The risk-free interest rate was based on rates established by the Federal Reserve Bank. The Company used its own historical stock’s volatility as the estimated volatility. The expected life of the conversion feature of the notes or options was based on the estimated remaining terms of the notes or options, or expected settlement date for notes due on demand or that have matured. The expected dividend yield was based on the fact that the Company has not customarily paid dividends to its holders of common stock in the past and does not expect to pay dividends to holders of its common stock in the future.

NOTE 6 - STOCKHOLDERS’ DEFICIENCY

Preferred Stock

The articles of incorporation of Veritec authorize 10,000,000 shares of preferred stock with a par value of $1.00 per share. The Board of Directors is authorized to determine any number of series into which shares of preferred stock may be divided and to determine the rights, preferences, privileges and restrictions granted to any series of the preferred stock.

In 1999, a new Series H convertible preferred stock was authorized. Each share of Series H convertible preferred stock is convertible into 10 shares of the Veritec’s common stock at the option of the holder. As of June 30, 2018 and 2017, there were 1,000 shares of Series H convertible preferred stock issued and outstanding.

Common Stock

On February 2, 2018, the Company’s Board of Directors voted to increase the Company’s authorized common shares to 150,000,000 common shares. The Company filed the requisite documentation with the State of Nevada in April 2018, with an effective date of April 18, 2018.

Common Stock to be Issued

At June 30, 2018 and 2017, 145,000 shares of common stock to be issued with an aggregate value of $12,500 have not been issued and are reflected as common stock to be issued in the accompanying consolidated financial statements.  

The Company has agreements with certain employees that provide for five years of annual grants of options, on each employment anniversary date, to purchase shares of the Company’s common stock. The option price is determined based on the market price on the date of grant, the options vest one year from the date of grant, and the options expire five years after vesting. The Company granted 2,500,000 options under this arrangement. There were no options granted in 2018 and 2017 under this agreement. Both the outstanding and exercisable stock options had no intrinsic value at June 30, 2018.

Additional information regarding options outstanding as of June 30, 2018 is as follows:

NOTE 8 - INCOME TAXES

For the years ended June 30, 2018, net income was $106,790, as compared to net loss of $1,369,907 for the year ended June 30, 2017. For the years ended June 30, 2018 and 2017, no provision for income taxes was recorded. We made no provision for income taxes due to our utilization of federal net operating loss carry forwards to offset both regular taxable income and alternative minimum taxable income.

Reconciliation between the expected federal income tax rate and the actual tax rate is as follows:

The following is a summary of the deferred tax assets:

The Company has provided a valuation allowance on the deferred tax assets at June 30, 2018 and 2017 to reduce such asset to zero, since there is no assurance that the Company will generate future taxable income to utilize such asset. Management will review this valuation allowance requirement periodically and make adjustments as warranted. The net change in the valuation allowance for the year ended June 30, 2018 was a decrease of $111,000.

Veritec has net operating loss carryforwards of approximately $12,284,000 million for federal purposes available to offset future taxable income that expire in varying amounts through 2035. The ability to utilize the net operating loss carry forwards could be limited by Section 382 of the Internal Revenue Code which limits their use if there is a change in control (generally a greater than 50% change in ownership). The Company is subject to examination by tax authorities for all years for which a loss carry forward is utilized in subsequent periods.

The Company follows FASB guidelines that address the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under this guidance, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. This guidance also provides guidance on derecognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. As of June 30, 2018 and 2017, the Company did not have a liability for unrecognized tax benefits, and no adjustment was required at adoption.

The Company’s policy is to record interest and penalties on uncertain tax provisions as income tax expense. As of June 30, 2018 and 2017, the Company has no accrued interest or penalties related to uncertain tax positions.

NOTE 9 – RELATED PARTY TRANSACTIONS

The Matthews Group is owned 50% by Ms. Van Tran, the Company’s CEO/Executive Chair and a director, and 50% by Larry Johanns, a significant stockholder of the Company. The Company has relied on The Matthews Group for funding (see Note 4).

Management Services Agreement and Related Notes Payable with Related Party

The Company’s Barcode Technology was invented by the founders of Veritec as a product identification system for identification and tracking of parts, components and products mostly in the liquid crystal display (LCD) markets and for secure identification documents, financial cards, medical records and other high security applications. On September 30, 2015, the Company sold all of its assets of its Barcode Technology comprised solely of its intellectual property to The Matthews Group. The Company then entered into a management services agreement with The Matthews Group to manage all facets of the barcode technology operations, on behalf of The Matthews Group, through June 30, 2019. The Matthews Group bears the risk of loss from the barcode operations and has the right to the residual benefits of the barcode operations.

In consideration of the services provided by the Company to The Matthews Group, the Company earned a fee of 20% of all revenues up to May 31, 2017 and 35% of all revenues up to June 30, 2019 from the barcode technology operations. During the year ended June 30, 2018 and 2017, the Company recorded management fee revenue related to this agreement of $376,580 and $172,930, respectively.

Additionally, pursuant to the management services agreement, all cash flow (all revenues collected less direct costs paid) of the barcode technology operations is retained by the Company as proceeds from unsecured notes payable due The Matthews Group. During the year ended June 30, 2018 and 2017, cash flow loans of $599,312 and $538,820, respectively, were made to the Company at 10% interest per annum and due on demand. At June 30, 2018, cash flow loans of $1,384,088 are due to The Matthews Group (see Note 4).

Convertible Notes Activity with Related Parties (see Note 4)

During the year ended June 30, 2017, the Company issued $477,500 of convertible notes payable to The Matthews Group. The convertible notes payable-related party can be converted at a price of $0.08 per share. The market price on the date some of the convertible notes payable-related party were issued was in excess of the conversion price, and as a result the Company recognized an expense of $35,000 which is included in interest expense.

No convertible notes were issued to The Matthews Group during the year ended June 30, 2018

Advances from Related Parties

From time to time, Ms. Van Tran provides advances to finance the Company’s working capital requirements. As of June 30, 2018 and 2017, total advances to Ms. Van Tran amounted to $96,110, respectively, and have been presented as accounts payable, related party on the accompanying Consolidated Balance Sheets. The advances are unsecured, non-interest bearing, and due on demand.

Other Transactions with Related Parties

The Company leases its office facilities from Ms. Tran. For both the years ended June 30, 2018 and 2017, rental payments to Ms. Van Tran totaled $51,000.

On March 1, 2017, the Company’s wholly owned subsidiary, Public Bell, Inc., entered into an Exclusive Product Provider Agreement (“Agreement”) with an affiliate of American Heritage College (AHC). Ms. Van Tran, the Company’s CEO/Executive Chair, is a part owner of the affiliate of AHC. Public Bell paid AHC $50,000 in exchange for AHC agreeing to purchase Wi-Fi/WiMax broadband equipment exclusively from Public Bell and for the exclusive right to provide future products and services to AHC. During the year ended June 30, 2017, the $50,000 paid to AHC was recorded to sales and marketing expense in the accompanying Consolidated Statements of Operations.

NOTE 10 – LEGAL PROCEEDINGS

On or about November 13, 2017, David A. Badhwa and Denise a Badhwa (collectively “Plaintiffs”) filed a lawsuit in district court in Hennepin County, Minnesota asserting that the Company breached the terms of a promissory note. Plaintiffs seek repayment on the principal of the promissory note, in the amount of $100,000, $10,000 of which Plaintiffs contend Veritec previously paid, plus interest, collection costs and attorney’s fees. As of May 15, 2018, the date of the last communication on the amount of recovery that Plaintiffs seek, Plaintiffs sought an award or settlement in the amount of $162,990. If Plaintiff’s prevail on their claims, the Court could award Plaintiffs the unpaid principal in the amount of $90,000, plus interest at the rate of eight percent (8%) per annum on the unpaid balance, as well as attorney’s fees incurred by Plaintiffs in seeking payment on the promissory note in an amount determined by the Court. An award of attorney’s fees could be significant. Veritec has vigorously defended Plaintiffs claims and has asserted a variety of counterclaims against Plaintiffs. Veritec has also attempted to engage Plaintiffs in settlement discussions, but Plaintiffs have not engaged in meaningful negotiations to resolve the claims in dispute. Management has recorded a liability related to this proceeding that it feels is adequate.

On September 21, 2016, the Company entered into a settlement agreement with an individual who was a former officer of the Company.  The individual in prior years was also issued 500,000 shares of common stock for services.  The Company alleged that the individual used the Company's intellectual property without approval.   Under the terms of the settlement agreement, the individual agreed to relinquish a convertible note payable and unpaid interest aggregating $364,686, and return 500,000 shares of common stock previously issued to him.  In turn, the Company agreed to release and discharge the individual against all claims arising on or prior to the date of the settlement agreement.  The Company recorded a gain on the settlement of $364,686 in the accompanying Consolidated Statements of Operations for the year ended June 30, 2017. As of June 30, 2018, the 500,000 shares have not been relinquished. When the Company receives the shares, it will record a cancellation of shares.

NOTE 11 – COMMITMENTS AND CONTINGENCIES

On December 5, 2008, the Company adopted an incentive compensation bonus plan to provide payments to key employees in the aggregated amount of 10% of pre-tax earnings in excess of $3,000,000 after the end of each fiscal year to be distributed annually to employees. As of June 30, 2018, the Company had not achieved an annual pre-tax earnings in excess of $3,000,000.

On December 5, 2008, the Company entered into an employment agreement with Van Thuy Tran, its Chief Executive Officer, providing for an annual base salary of $150,000 and customary medical and other benefits. The agreement may be terminated by either party upon 30 days’ notice. In the event the Company terminates the agreement without cause, Ms. Tran will be entitled to $1,000,000 payable upon termination, and she will be entitled to severance equal to 12 months compensation and benefits. The Company has also agreed to indemnify Ms. Tran against any liability or damages incurred within the scope of her employment.