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Veritec, Inc - Recent Material Event
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PART I
FORWARD-LOOKING STATEMENTS
This Form 10-K contains various “forward-looking statements” within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Forward-looking statements represent expectations and beliefs concerning a company’s
outlook, future economic events, future performance and attainment of future goals and are based on
information available on the date of the filing, and are subject to various risks and
uncertainties.
The Private Securities Litigation Reform Act of 1995 provides “safe harbor” for forward-looking
statements. Certain information included in this Form 10-K and other materials filed or to be
filed with the Securities and Exchange Commission (as well as information included in oral
statements or other written statements made or to be made) contain statements that are
forward-looking and actual results may materially differ from any future results expressed or
implied by such forward-looking statements. In addition to statements that explicitly describe
such risks and uncertainties readers are urged to consider statements using the terms “anticipates”
“belief”, “believes”, “can”, “intends”, “may”, “plans”, “shall”, or “will”, and similar expressions
to be uncertain and forward-looking. Such forward-looking statements involve important risks and
uncertainties that could significantly affect anticipated results in the future and accordingly,
such results may materially differ from those expressed as our desired outcome, goal, or result.
We undertake no obligation to update any forward-looking statements to reflect events or
circumstances that may arise after the date hereof unless specifically required by the filing
requirements of the Securities and Exchange Act as amended or, the Regulations promulgated
thereunder.
ITEM 1 BUSINESS
Summary
The Company is primarily engaged in the development, marketing, and sales of products that utilize
Matrix Symbology technology, a two-dimensional barcode technology originally invented by the
founders of Veritec under United States patents 4,924,078, 5,331,176, 5,612,524 and 7,159,780.
Based on our proprietary technologies, we have developed and are marketing the following main
products:
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Our plans are to continue focusing on product improvements, sales, and marketing of these product
categories. Recently, the Company added additional independent sales representatives and
distributors to assist us in the marketing of our new products: the PhoneCodes©, ID Card
Printing Systems and the Time and Attendance Software. We believe these new products, along with
the addition of new distribution outlets, will open up new opportunities for Veritec.
Veritec’s products are based upon its proprietary VSCode® and VeriCode®
Symbology. In addition to its United States patents for VSCode® and
VeriCode® Symbology , the Company holds patents in Europe (German Patent No. 69033621.7;
French Patent No. 0438841; and Great Britain Patent No. 0438841); and has applications pending with
the United States Patent and Trademark Office for uses of its Multi-Dimensional Matrix Symbology.
Company History
Veritec was incorporated in the State of Nevada on September 8, 1982 for the purpose of
development, marketing and sales of a line of microprocessor based encoding and decoding system
products that utilize Matrix Symbology Technology, a two-dimensional barcode technology originally
invented by the founders of Veritec under United States patents 4,924,078, 5,331,176, 5,612,524 and
7,159,780. As more fully described below, three of these patents are the property of Vcode
Holding, Inc. (Vcode).
In 1995, an involuntary proceeding under Chapter 7 of the United States Bankruptcy Code was
commenced against us. The proceeding was subsequently converted to a Chapter 11 proceeding and a
plan of reorganization was confirmed on April 23, 1997. The plan was completed, the trustee was
discharged, and the case closed on October 13, 1999.
In January 2002, Veritec initiated arbitration in the International Court of Arbitration of the
International Chamber of Commerce in Los Angeles, California, against Mitsubishi Corporation
(Mitsubishi), alleging five causes of action arising out of various contracts and business
dealings. Mitsubishi counterclaimed and arbitration commenced.
In November 2003, Veritec formed a wholly owned subsidiary, Vcode, to which it assigned United
States patents 4,924,078, 5,331,176 and 5,612,524, together with all corresponding patent
applications, foreign patents, foreign patent applications, and all continuations, continuations in
part, divisions, extensions, renewals, reissues and re-examinations. As used in this report, “the
Company” refers to Veritec, Inc. (Veritec) and Vcode. Vcode in turn entered into an Exclusive
License Agreement with VData LLC (VData), an Illinois limited liability company unrelated to
Veritec. The purpose of the Exclusive Licensing Agreement is to allow VData to pursue enforcement
and licensing of the patents against parties who wrongfully exploit the technology of such patents.
VData is the wholly owned subsidiary of Acacia Research Corporation (NASDAQ: ACTG) (collectively
Acacia). The Exclusive License Agreement provides that all expenses related to the enforcement and
licensing of the patents will be the responsibility of VData, with the parties sharing in the net
proceeds, as specified under the terms of the agreement, arising from enforcement or licensing of
the patents.
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In February 2005, an adverse ruling was made in the arbitration proceeding against Veritec in favor
of Mitsubishi, resulting in a monetary award of $8,174,518 to Mitsubishi and enjoining Veritec and
by extension
Veritec’s customers from the future use or sale of Mitsubishi’s EDAC Technology. This ruling
compelled Veritec to file a voluntary petition for relief under Chapter 11 of the United States
Bankruptcy Code in the United States Bankruptcy Court (Bankruptcy Court) for the District of
Minnesota on February 28, 2005.
After reaching an agreement with Mitsubishi and other creditors, in April 2006, Veritec’s Third
Amended Plan of Reorganization was confirmed by the Bankruptcy Court. On August 8, 2006, the
Bankruptcy Court entered an Order and Final Decree closing the Chapter 11 case in its entirety. As
a result of the Chapter 11 bankruptcy, Veritec settled $9,356,948 of debts including $7,874,518
owed to Mitsubishi. In connection with the settlement with Mitsubishi, we obtained a license to
certain Mitsubishi EDAC technology and granted Mitsubishi a license to VeriCode®.
Since emerging from bankruptcy, we have been focused on development of new applications for
encoding and decoding technologies. However, infringement revenue has continued to be the primary
source of revenue for the Company in recent periods. Patents 4,924,078 and 5,612,524 are currently
being reexamined by the U.S. Patent and Trademark Office. The Company recently received a
determination by the U.S. Patent and Trademark Office stating that some of the claims in the
patents were patentable and others were being rejected. The Company has submitted a rebuttal
against the decision and is awaiting a final determination. Furthermore, the Company is currently
engaged in litigation with Cognex Corporation pursuant to which the United States District Court
for the District of Minnesota recently ruled that the 5,612,524 patent was invalid and
unenforceable. The Company plans to appeal this decision. As a result of these actions,
infringement revenue from patents 4,924,078 and 5,612,524 has ceased.
Our Products
Based on our proprietary technologies, we have developed and are marketing the four main products
described below: Product Identification and tracking products, Secure Bio-ID cards (including time
and attendance systems), Stored-Value cards and products based on PhoneCodes©
technology. Our plans are to continue focusing on product improvements, sales, and marketing
of these product categories. Recently, the Company added additional independent sales
representatives and distributors to assist us in the marketing of our new products: the
PhoneCodes©, ID Card Printing Systems and the Time and Attendance Software. We believe
these new products, along with the addition of new distribution outlets, will open up new
opportunities for Veritec.
(a) Product Identification: The VeriCode®
Our principal product to date has been a Product Identification system for identification and
tracking of manufactured products using our VeriCode® barcode technology. This
technology has been used in the LCD business for many years. Sales of this product have been
focused in the Far East; however, the Company had discussions with U.S. companies and believes a
U.S. market can be developed. The vast majority of our non-infringement revenue in recent periods
has been derived from sales of these products. We recognize these revenues in the form of license
fees, almost entirely from our customers in Asia.
The VeriCode® symbol is a two-dimensional high data density machine-readable symbol that can
contain up to approximately 500 bytes of data in an area as small as the head of a pin. The
VeriCode® symbol is based on a matrix pattern. The matrix is made up of data cells, which are
light and dark contrasting squares. This part of the symbol looks like a scrambled chessboard.
The matrix is enclosed within at least one or more solid lines and/or a solid border. Surrounding
the solid border is a quiet zone of empty cells. This simple structure is the basis for the
symbol’s space efficiency.
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The size of the VeriCode® symbol is variable and can be increased or decreased depending on
application requirements. The symbol can be configured to fit virtually any space. The data
capacity of the symbol is
also variable. By using a greater or smaller number of data cells, more or less information can be
stored in the symbol. The main limitation to the size and density of the VeriCode® symbol is the
resolution of the marking and reading devices utilized by the user.
Special orientation for reading the symbol is not necessary and is the basis of the novelty of
Vcode’s United States Patent No. 5,612,524. The VeriCode® symbol can be read at high degrees of
angularity from vertical, in any direction relative to the reader. Veritec’s symbology and reading
software presently employs “Error Detection and Correction” (EDAC) technology of our own design,
similar to that on music CD’s. That means if a symbol is partially damaged or obscured, the
complete data set stored in the symbol might be recovered. EDAC lowers the symbol’s data capacity,
but it can permit data recovery if up to 25% of the symbol is damaged. With EDAC, the code will
return either accurate information or no information, but it will not return false or wrong
information.
The VeriCode® symbol offers high degrees of security and the level of this security can be
specified depending on the user’s requirements. For any specific application or organization, a
unique encryption algorithm can be created so that only authorized persons can create or read a
VeriCode® symbol within the user’s application.
The VeriCode® symbol can hold any form of binary information that can be digitized
including numbers, letters, images and the minutia for biometric information to the extent of its
data storage capacity.
(b) Secure Bio-ID Cards and Time and Attendance Software: The VSCode®
The VSCode® is a derivative of the two-dimensional VeriCode® symbol with the
ability to encrypt a greater amount of data by increasing data density. The VSCode® is
a data storage “container” that we believe 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, the minutia for biometric information, including fingerprints, 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 bankcards and high security applications.
Because the code is encrypted on the card it can be an independent portable database containing
non-duplicative information that is unique to the individual owner of the bank account or credit
card; or, the data can be verified through a central database while maintaining high security for
the card issuer without the need of a PIN.
Secure Bio-ID cards present the cardholder’s picture, fingerprint minutia and other pertinent data
that can be produced in either a soft or hard card material. We have developed a number of
products based on our technology; however, sales have been limited to date. In fiscal 2008, the
Company sold its first ID card printing system to an Indian tribe living in the U.S. that
frequently crosses the U.S./Canadian border. The card printing system, which produces the ID card
inclusive of the individual’s picture and Veritec’s VSCode®, allows the Indian tribe to
produce identification cards that enable them to enroll tribal members and their descendants and to
act as a supplement to U.S. passports. The ID card includes the individual’s picture and a
fingerprint, which is stored inside the VSCode®. The Company is having ongoing
discussions with other Indian tribes (and countries) for use of this ID card printing system.
The FCR-100 is a compact fingerprint card reader used to read and decode the VSCode®
data. It consists of a combination of several modular components, including a quality camera,
lighting mechanism, digital fingerprint reader, software lock, USB cable and housing, all tied into
a PC operating system running the proprietary Veritec software. Due to its modular design, the
FCR-100 can be modified to meet specific application needs.
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The FCR-100 can be designed to work on most PC based operating systems, including the full suite of
Windows® operating systems. This allows the operating system to function with the many
different types of VSCode® applications such as bankcards, access control, personnel
identification, border control, and hospital identification Cards. The FCR—100 is connected and
powered by a USB cable connection to a PC or server. The FCR-100 can be utilized with wireless
applications and will allow multiple reading stations to be connected to a single computer.
We have recently introduced Time and Attendance system products, user-friendly systems that include
our Secure Bio-ID card maker and our proprietary card reader software to produce and to read our
Secure Bio-ID cards as well as keeping track of individual time and attendance. The Company has
beta-tested the software over the last few months, sold the first system in December 2007, and
believes it is now ready to market additional systems.
In October 2006, the Company purchased the assets of Secure Enterprises Inc (SEI). From the
acquisition, the Company obtained SEI’s web based software platform that enables customers to
purchase identification cards, such as badges, picture ID and visitor ID , via the Internet. The
program permits the customer to review the card’s design and input the data from their facility.
The information is then uploaded to the Company’s system, where the card is printed, packaged and
shipped the same day.
(c) Stored-Value Cards
The Company recently obtained a license from RBA International for a software platform for mobile
banking utilizing the VSCode® technology in connection with a Visa debit card program,
which has been approved for use on the Plus® and Star® ATM networks. This
prepaid debit card program provides for closed loop, real time mobile internet banking transactions
with an additional, patented safety feature that allows the account holder to toggle the card “on”
and “off” to prevent unauthorized usage of the card. To date, Visa has declined requests by RBA
International to add the Company’s VSCode ® data storage feature to its debit cards.
The Company intends to commence marketing of stored-value cards through relationships with one or
more financial institutions.
(d) PhoneCodes©
We have developed a number of products based on our PhoneCodes© technology, but we have
not derived revenues from these products to date. These software products will allow individuals or
companies to receive or distribute gift certificates, tickets, coupons, receipts, or banking
transactions using the VeriCode® technology via wireless phone or PDA. The Company is
having discussions with several companies for usage of the PhoneCodes© products.
The GiftCode© allows an individual to purchase, by phone, by internet or in person a
gift Card for a specific dollar amount from a retailer. The gift Card can be sent to the recipient
via wireless phone and include a message and a two-dimensional matrix code that has the detailed
information of the gift Card including the amount, the retailer, etc. That recipient can redeem
the gift Card by selecting merchandise from the retailer and redeeming the gift Card value via a
code reader at the register at the time of checkout.
TicketCode©, introduced to the market in 2007, for concerts, sporting events, theme
parks, etc. can be purchased by phone or internet and received via wireless phone. The
TicketCode© also has the capabilities of including a message and the two-dimensional
matrix code along with the event information (date, time, row, seat number, etc.) When arriving at
the event, the wireless phone can be scanned at the gate via a code reader allowing immediate
entrance.
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The CouponCode© is a means for a retailer to increase sales through personalized
targeted marketing campaigns. The retailer can tailor the CouponCode© with company
graphics, text messages and the two-dimensional matrix code and send it directly to the customer’s
wireless phone. The customer redeems the coupon by passing the wireless phone over the code reader
and crediting the coupon value against the purchase.
The ReceiptCode© is the means for financial institutions, retailers and consumers to add security
to electronic on-line transactions by sending a receipt electronically in the form of a 2-D
barcode. One example, banking over the Internet, the present system allows a purchase to take
place by simply filling out the credit card number, expiration date and the three digit code on the
back of the plastic card. Presently, the cardholder receives notification of the transaction at
much later time via mail or Internet. A ReceiptCode© would help prevent the fraudulent use of the
card by notifying all parties involved instantly in real time by way of an electronic 2-D barcode
which can be received over the cell phone.
Our Intellectual Property
Patents
United States Patent No. 4,924,078 was issued on May 8, 1990 on our founders’ application
filed November 25, 1987. United States Patent No. 5,612,524 is a continuation of the 4,924,078
patent. U.S. Patent No. 5,331,176 was issued on July 19, 1994 on our founders’ application filed
on April 10, 1992. Veritec has filed for additional U.S. patents related to novel uses of the
Matrix Symbologies. The Company holds the following European Patents: Germany Patent No.
69033621.7; French and Great Britain Patent No. 0438841.
Trademarks
We have filed applications to register the trademark “VeriSecure” in the United States. We
have also filed applications to trademark “VSCode” in the following countries: Australia, Taiwan,
South Korea, Singapore, Japan, China, and Vietnam. In addition we have filed applications to
register VeriCode® in the following countries: China, Singapore, Vietnam, and Australia. We have
registered trademarks for VeriCode® and VSCode® in the United States and the VeriCode® in Taiwan
and South Korea. The Company uses the following copyrights VeriWrite©, VeriRead©, VSWrite©,
VSRead©, PhoneCode©, TicketCode©, GiftCode©, CouponCode© and ReceiptCode©.
Major Customers
During the fiscal year ended June 30, 2008 and 2007, 33% and 80% respectively, of our revenue was
from our Exclusive License Agreement with VData. Of the remaining revenue, 59% and 19% was from
foreign customers for the years ended June 30, 2008 and 2007, respectively.
Engineering, Research and Development
As of June 30, 2008, Veritec employed three full-time engineers and three consultants. For fiscal
year 2008, we have concentrated on several projects, which include the development of additional
readers, ancillary corrective features built into our VSCode® that allow for damaged 2-D codes to
self repair and maintain readability, implementation of our 2-D matrix codes into other
manufacturer’s readers, the completion of the time and attendance software and the development of a
card maker and card reader program called VeriSuite. The VeriSuite provides flexible access to the
core Veritec card maker/ reader and symbol encoding/ decoding technology. A framework allows
integration into new and existing, divergent and dynamic business
applications. We believe the VeriSuite software will ensure that Veritec remains agile and
competitive in a variety of markets, current and emerging, that leverage card making/reading and 2D
symbol technology.
All of these projects are currently in various stages of development or have been completed.
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Competition
The “symbology” business is intensely competitive. The Company is presently under-capitalized and
recently emerged from bankruptcy. Consequently, there can be no assurance that the Company will be
able to successfully compete in the “symbology” business.
Our VeriCode® and VSCode® Matrix Symbologies compete with alternative
machine-readable codes such as conventional bar code systems, including UPC, EAN Code 39 and Code
49; and alphanumeric systems such as OCR-A and OCR-B. Competitors offering alternative symbologies
include numerous well capitalized publicly traded companies who offer a spectrum of bar code
related systems including Motorola Inc (NYSE: MOT); Zebra Technologies Corporation (NASDAQ: ZBRA);
and Siemens Energy and Automation, Inc., a subsidiary of Siemens AG (NYSE: SI).
The “DataMatrix” two-dimensional bar code is an established competitor to the VeriCode®.
The DataMatrix code was popularized by Robotic Vision Systems, Inc., which declared the DataMatrix
symbol to be “in the public domain.” In contrast, our VeriCode® Symbol and technology
are protected by various U.S. and European patents and our software source codes are proprietary
and protected by copyright.
Veritec believes that while many potential customers and users of symbology prefer to use a system
that is believed to be in the public domain with open source code software applications, other
companies, especially those requiring high security encoding and decoding capability will prefer to
purchase “closed” or proprietary systems. Our technology may be the technology of choice for these
potential customers.
Employees
As of June 30, 2008, inclusive of the three full-time engineers and three contracted consultants
employed by the Company in its engineering, research and development department as described above,
the Company employs eight full-time employees, and three consultants.
Financial Information about Geographic Areas
In fiscal 2008, United States customers accounted for 41% (81% in fiscal 2007) of the Company’s
total revenue. The remaining revenue of 59% (19% in fiscal 2007) was from foreign customers. To
date, as was in fiscal year 2007, our foreign revenues are concentrated in Japan, Korea, Taiwan and
Germany.
Available Information
The public may read and copy any materials we have filed with the Securities and Exchange
Commission (SEC) at the SEC’s Public Reference Room at 100 F Street, N.E., Washington D.C. 20549.
The public may obtain information on the operation of the Public Reference Room by calling the SEC
at 1-800-SEC-0330. We electronically file reports with the SEC. Filings may be found on the
Internet site maintained by the SEC at www.SEC.gov; or, by accessing www.freeedgar.com; and other
Internet based financial service providers. Other information about us can be found at our
website, www.veritecinc.com and by contacting the Company at 2445 Winnetka Avenue North, Golden
Valley, Minnesota 55427 (763) 253-2670.
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ITEM 1A RISK FACTORS
Risk Factors
Investing in our Company entails substantial risk. In addition to the other risks and uncertainties
discussed herein or available from outside sources, a number of risks and uncertainties that could
cause actual results to differ materially from the plans, intentions and expectations reflected in
or suggested by forward-looking statements of the Company set forth within the body and Exhibits
hereof include amongst other things:
We Have a History of Operating Losses
We have a history of operating losses that were a substantial factor in the Company having been
placed in bankruptcy from October 1995 through October 1999 and again from February 2005 through
August 2006. To halt the continuation of these losses, we are developing new products, entering
new markets and developing strategic alliances to grow revenue. There can be no assurance that we
will be successful in these efforts, and even if we are, whether we can become profitable.
Doubt About Ability to Continue as a Going Concern
The Company has traditionally been dependent on The Matthews Group, LLC, a related party, owned 50%
by Van Tran, the Company’s chief executive officer and a director, and 50% by Larry Johanns, a
significant Company’s stockholder, for its financial support. The Matthews Group made total
payments of $2,000,000 through June 30, 2008, as required under a subscription receivable. However
additional capital most likely will be required to continue the Company’s business, and the Company
does not believe that The Matthews Group will continue to provide funding. At June 30, 2008, the
Company had $334,702 in cash and $61,093 in working capital. The Company will require additional
funds to continue its operations through fiscal 2009 and continue to develop its existing and
future projects by obtaining investment funds, generating sufficient sales revenue, implementing
dramatic cost reductions or any combination thereof. However, there is no assurance that the
Company can be successful in raising such funds, generating the necessary sales or reducing major
costs.
Further, due to the Company’s prior bankruptcies and history of losses, it may be difficult for the
Company to raise additional funds, if required. If the Company cannot raise such capital, or if
the cost of such capital is too high, we may be unable to successfully launch or continue
development of new products. If losses continue, we may unable to continue in business. These
matters raise substantial doubt that the Company will be able to continue as a going concern.
Loss of the Services of Key Employees Could Harm Our Operations
The Company’s performance depends on the talents and efforts of our key management and technical
employees. The loss of certain key individuals could diminish our ability to maintain
relationships with current and potential customers or to meet development and implementation
schedules for existing technology and the technology that the Company intends to introduce in the
future. Our future success also depends on our continuing ability to identify, hire, train and
retain highly qualified technical and managerial personnel. We currently have no Chief Financial
Officer, and although we are in the process of hiring a suitable new candidate, we depend on our
Board members and outside consultants to guide the company’s financial operations while we continue
the search. If we fail to attract or retain these key individuals in the future, our business
could be disrupted.
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Cessation of Infringement Revenues from VData and Intellectual Property
The Company, in the past, has been dependent on infringement revenues from VData for a significant
portion of its revenue. As a result of the adverse ruling on the Declaratory Judgment sought by
Cognex, our future ability to obtain infringement revenues for the 4,924,078 and 5,612,524 patents,
we believe, has ceased.
Competition in the Asian Market
The Company currently relies heavily on its sales to the Asian markets. We believe the
cross-licensing agreement we executed with Mitsubishi that allowed for our emergence from
bankruptcy and competition from others in the Machine Readable Information and symbology sector,
has resulted in increased competition and impacted future sales.
Effect of the Bankruptcy
The Company having been in bankruptcy has made it difficult for the Company to establish new trade
credit relationships with both vendors and customers. Although the Company believes it will
restore its credibility going forward, the lack of trade credit could impair the Company’s ability
to grow and implement its plans.
Competition
Our VeriCode® and VSCode® Matrix Symbologies compete with alternative
machine-readable codes such as conventional bar code systems, including UPC, EAN Code 39 and Code
49; and, alphanumeric systems such as OCR-A, OCR-B, PDF-417, Data Matrix and many others.
Competitors offering alternative symbologies include numerous well capitalized private and publicly
traded companies who offer a wide variety of bar code systems and solutions, as well as,
alternative product solutions such as Radio Frequency Identification (RFID) and Global Positioning
Satellite (GPS) technology. Our competitors include but are not limited to: Intermec (NYSE: IN);
Siemens Energy and Automation, Inc., a subsidiary of Siemens AG (NYSE: SI); Motorola Inc (NYSE:
MOT); and, Zebra Technologies Corporation (NASDAQ: ZBRA). These companies have more resources than
the Company, already have a strong customer base, and their products are widely used in the market
place. Competition from such companies may further reduce the future level of demand for the
Company’s products and/or the Company’s future margins of profit.
General Conditions Beyond the Company’s Control
The general economic condition of the United States and other regions of the world, work
disruptions, labor negotiations both at the Company and with our licensees and distributors,
actions of the U.S. and foreign governments, foreign currency exchange rate fluctuations, inflation
and other economic events all to varying degrees do, could and would have an effect upon the
Company some of which could have a material adverse impact.
ITEM 1B UNRESOLVED STAFF COMMENTS
Not applicable
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ITEM 2 PROPERTIES
We lease approximately 3,200 square feet of office and laboratory space at 2445 Winnetka Avenue
North, Golden Valley, Minnesota, which serves as our primary place of business. This lease is with
Van Thuy Tran, a director and chief executive officer of the Company. Our lease requires monthly
payments of $3,150 and runs through June 30, 2012, with an option to automatically extend the lease
for two one-year extensions.
Veritec leased on a month-to-month basis, a single-family residence located at 10310 -
39th Avenue North, Plymouth, Minnesota to house visitors, consultants and employees
hired from outside the State of Minnesota versus the high cost of hotel lodging. The lease
required a monthly payment of $1,500. The residence is owned by Larry Johanns, a principal of The
Matthews Group. This lease expired on September 1, 2007.
In January 2007, the Company began leasing on a month-to-month basis, a single-family residence
located at 2415 Winnetka Ave. N., Golden Valley, Minnesota to house visitors and consultants. The
lease required a monthly payment of $1,700. The residence is owned by Van Thuy Tran, a director
and chief executive officer of the Company. This lease was terminated on October 1, 2007.
ITEM 3 LEGAL PROCEEDINGS
Vcode joined with VData as Plaintiffs in patent enforcement litigation filed on October 4, 2005,
against Brother Industries, Ltd., Sato Corporation, Toshiba Corporation and US Bank National
Association in the United States District Court for the District of Minnesota alleging violations
of the Company’s patents. US Bank National Association has entered into a licensing agreement with
the Company and the case as to that defendant was dismissed. The remaining defendants, Brother
Industries, Ltd., Sato Corporation, and Toshiba Corporation, did not settle but were dismissed from
the case without prejudice. VData and the Company must wait for resolution of the patent
reexaminations, described below, before re-asserting claims against the remaining defendants.
On March 13, 2006, in response to notices of infringement sent to its customers by VData, Cognex
Corporation filed a preemptive action seeking a Declaratory Judgment against VData and the Company
in the United States District Court for the District of Minnesota. Amongst other remedies the
action seeks a ruling from the court that Vcode’s United States Patent No. 5,612,524 is not
enforceable against Cognex Corporation and its customers, that the Company has defamed Cognex and
that the Company has engaged in unfair and deceptive business practices in violation of Minnesota
law. On December 27, 2006, an answer and affirmative defense was filed to contest the plaintiff’s
allegations and claims for damages, injunctive relief, attorney’s fees, and costs. On May 19,
2008, the summary judgment was received ruling in favor of Cognex on three of the four claims. The
Court found that the asserted claims of the 5,612,524 patent were invalid, the entire patent
unenforceable and denied our motion to dismiss the defamation claim. However the Court did grant
our motion to dismiss the Minnesota DTPA (Deceptive Trade Practices Act) claim. Cognex
subsequently filed a motion for the Court to declare this an exceptional case and award Cognex its
attorney fees. The Company, along with the other defendants, filed an opposition to this motion.
No decision has been made by the Court to date on this motion.
On April 6, 2006, the U.S. Patent and Trademark Office granted a Third Party Request for an Ex
Parte Reexamination of Vcode’s United States Patent No. 5,612,524. A response on behalf of the
Company rebutting the allegations in the Request for Reexamination was filed with the U.S. Patent
and Trademark Office. In December 2007, the Company received a determination by the U.S. Patent
and Trademark Office stating that some of the claims in the patent were patentable and others were
being rejected. The Company submitted a rebuttal against the decision in February 2008. The
Company believes that when the final determination occurs, even if the determination is adverse to
the patent, it would not be detrimental to the
Company’s ability to market its products, but will be detrimental to the collection of licensing
fees based upon this patent.
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On May 23, 2006, Vcode joined with VData as a Plaintiff in a pending patent enforcement litigation
filed against Aetna, Inc., PNY Technologies, Inc., Merchants’ Credit Guide Co., The Allstate
Corporation, and American Heritage Life Insurance Company in the United States District Court for
the District of Minnesota alleging violations of the Company’s patents. The Allstate Corporation
and American Heritage Life Insurance Company have entered into a licensing agreement with the
Company and the case as to those defendants has been dismissed. Aetna, Inc., and Merchants’ Credit
Guide Co., have filed responsive pleadings in the action. PNY Technologies, Inc. has
counterclaimed with allegations of non-infringement, invalidity, and inequitable conduct and is
seeking attorney’s fees and costs. Defendant Aetna, Inc. filed a Motion to Dismiss and a Motion
for Rule 11 Sanctions. The Court denied both of Aetna’s motions. Defendant Merchant’s Credit
Guide Co. filed a Motion to Stay Alternative Motion for Sanctions. The Court granted Merchants’
Motion to Stay and the case is currently stayed pending reexamination of the patents. This case
has not been set for trial.
On October 26, 2006, a Third Party Request for an Ex Parte Reexamination of Vcode’s United States
Patent No. 4,924,078 was made. The Company was awaiting a determination from the U.S. Patent and
Trademark Office as to whether a grant of the request for reexamination was merited. On January
17, 2007, the reexamination for United States Patent No. 4,924,078 was ordered. The Company
believes that a determination adverse to the patent would not be detrimental to the Company’s
ability to market its products, but could be detrimental to the collection of licensing fees based
upon this patent.
On April 16, 2007, Vcode and VData filed a patent infringement case in the Eastern District of
Texas against Cognex relating to United States Patent No. 5,331,176. Cognex has counterclaimed for
non-infringement and invalidity. In April 2008, an agreement between the parties was reached to
dismiss without prejudice the claim. The agreement has been signed by all parties and fully
executed.
Vcode joined with VData as Plaintiffs in patent enforcement litigation filed on August 21, 2007,
against Data Logic, Inc., Hand Held Products, Inc. and Siemens Energy and Automation, Inc. in the
United States District Court for the District of Texas alleging violations of the Company’s Patent
No. 5,331,176. Hand Held Products, Inc. has entered into an agreement with the Company and the
case as to that defendant was dismissed. In April 2008, a proposed agreement between the remaining
parties was reached to dismiss without prejudice the claim. The agreement is awaiting the
signatures of all parties.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
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PART II
Market Information
Our common stock is traded in the over-the-counter market. Quotations are available on the OTC
Pink Sheets. The common shares are not traded or quoted on any automated quotation system. The
OTC Pink
Sheet Symbol for our common stock is “VRTC.PK”. The following table sets forth the range of high
and low bid quotes of our common stock per quarter as provided by the National Quotation Bureau
(which reflect inter-dealer prices without retail mark-up, mark-down or commission and may not
necessarily represent actual transactions).
Shareholders
As of September 22, 2008, there were approximately 795 shareholders of record, inclusive of those
brokerage firms and/or clearinghouses holding our common shares for their clientele (with each such
brokerage house and clearing house being considered as one holder).
Dividend Information
We have not paid or declared any dividends upon our common stock since our inception and, by reason
of our present financial status and contemplated financial requirements, we do not anticipate
paying any dividends in the foreseeable future.
Current Sales of Unregistered Securities
2,000 shares of common stock were issued to a Company employee as compensation in May 2008. 17,000
shares of common stock were issued to a Company employee as compensation in September 2007.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth information with respect to shares of common stock issuable under
outstanding options and warrants relating to compensation arrangements.
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Results of Operations — June 30, 2008 compared to June 30, 2007
We had a net loss of $768,879 in the fiscal year ended June 30, 2008 compared to a net loss of
$261,203 in the fiscal year ended June 30, 2007.
Revenues
Details of revenues are as follows:
License and hardware revenues are derived from our Product Identification systems sold principally
to customers in the LCD monitor industry. Infringement revenues resulted from patent infringement
claims prosecuted by VData. Identification Card revenues in these periods were a result of sales of
identification card systems.
The license and hardware revenue increase was mainly attributable to growth of the demand for LCD
screens. Revenues from the LCD market remain unpredictable as they are generated when customers
open new production facilities or update production equipment; however, for now the Company
continues to experience relatively high demand for product identification product licenses in the
LCD industry. A large portion of our license and hardware sales are concentrated in the Asian
market, which increased $52,133 in Taiwan, $174,738 in Korea, and decreased $10,593 in Japan and
Singapore. The largest increase of our license and hardware sales for the year ended June 30,
2008, was in Germany, which increased $154,752.
The decrease in our infringement revenues was the result of the two patents (nos. 4,924,078 and
5,612,524), that were the subject of our major infringement claims in the past, are currently being
reexamined by the U.S. Patent and Trademark Office. United States District Court for the District
of Minnesota recently ruled that the 5,612,524 patent was invalid and unenforceable. The Company
plans to appeal this decision. As a result of these actions, infringement revenue from patents
4,924,078 and 5,612,524 has ceased.
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Cost of Goods Sold
Cost of sales for the year ended June 30, 2008, totaled $196,442 and for the year ended June 30,
2007, cost of sales were $74,030, an increase of $122,412. As a percentage of revenue, for the
year ended June 30, 2008, cost of sales was 14.7% compared to 3.3% for the year ended June 30,
2007. Charges of $115,500 for a designated site and maintenance services of a computer database to
store information in conjunction with our
Independent Sales Organization (ISO) license, purchased in December 2006, accounted for 59% of the
total cost of goods sold for the year ended June 30, 2008, compared to $48,125 or 65% for the year
ended
June 30, 2007. For the year ended June 30, 2008, a reserve for slow moving inventory was
established totaling $21,600 whereas for the year ended June 30, 2007, no reserve was deemed
necessary. For the year ended June 30, 2008, the Company purchased equipment for four Card ID
Systems versus the year ended June 30, 2007, in which the Company sold no Card ID Systems. Cost of
goods sold associated with the license, hardware and identification revenue was $59,942 or 6.8% of
total licensing, hardware and identification card revenue for the year ended June 30, 2008,
compared to $25,905 or 5.9% for the year ended June 30, 2007. The increased cost percent was the
result of larger hardware revenue in fiscal 2008 that yields a higher cost compared to more license
revenue, which carried almost no cost in fiscal 2007.
Operating Expenses
Research and development expense for the year ended June 30, 2008 totaled $580,220 versus $391,984
for the year ended June 30, 2007. The increase of $188,236 was a result of increased consultant
and project costs totaling $399,450 for the year ended June 30, 2008 compared to $264,224 for the
year ended June 30, 2007, a difference of $135,226. For the year ended June 30, 2008, the Company
increased their use of inside consultants and outside contractors for projects that include the
design and build of four prototype readers, the development of a banking kiosk, a study on the
feasibility of banking transactions via cell phone and improved error and corrections capabilities
in the VSCode®.
Sales and marketing expense for the fiscal year ended June 30, 2008 were $242,839 compared to
$238,988 for the fiscal year ended June 30, 2007, an increase of $3,851. For the year ended June
30, 2008, the Company’s tradeshow and travel costs were $32,228 compared to $10,248 for the year
ended June 30, 2007, a difference of $21,980. During the year of fiscal 2008, the Company
concentrated on international sales opportunities thereby incurring larger travel costs. The
Company did reduce their payroll costs by $31,774 for the year ended June 30, 2008.
General and administrative expense for the fiscal year ended June 30, 2008 were $1,099,634 a
decrease of $705,788 over the prior year ended June 30, 2007. The decrease was the result of some
expenditures for the year ended June 30, 2007 that did not occur in the year period ended June 30,
2008. Bad debt expense for the year ended June 30, 2008 was ($47,910), a result of the recovery of
$48,000 originally reserved for a RBA note receivable issued in fiscal 2007 that was later
collected in fiscal 2008, whereas for the year ended June 30, 2007, bad debt expense was $245,000,
a difference between the fiscal years of $292,910. The $245,000 expense for the year ended June
30, 2007, was due to the write-off and reserve of RBA notes receivable. For the year ended June
30, 2008, no executive bonuses were issued compared to the year ended June 30, 2007, in which the
Directors of the Company granted the CEO of the Company a bonus of $300,000. Other contributing
factors for the decrease include for the year ended June 30, 2008, a reduction in stock/stock
option expense of $85,690 compared to the year ended June 30, 2007, a result of less issuance of
stock/stock options and lower market prices of the company’s common stock. Lower administrative
consultant costs for the year ended June 30, 2008 versus the year ended June 30, 2007 of $26,518,
primarily a result of terminating the agreement for the services of an in house legal expert.
Legal and audit expenses for the year ended June 30, 2008 compared to the year ended June 30, 2007
were down $42,880 a result of internal staffing performing more of the tasks.
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Other Income (Expense)
Interest income for the fiscal year ended June 30, 2008 was $17,833 compared to $44,860 for the
fiscal year ended June 30, 2007 a decrease of $27,027. The decrease was a result of the Company’s
need for cash to fund the operations, thus drawing down cash reserves and in so doing earning less
interest.
Capital Expenditures and Commitments
During the fiscal year ended June 30, 2008, we made capital purchases of $27,672 compared to
$78,179 in 2007. For the year ended June 30, 2008, the Company purchased computer equipment
necessary for the production of PhoneCodes© totaling $22,750. The remaining amount of
$4,922 was purchases of computers for R&D design and testing.
Liquidity
For the years ended June 30, 2008 and 2007, the Company received cash from infringement revenue of
$445,349 and $1,767,894, respectively, through its relationship with VData. The patents (4,924,078
and 5,612,524), which were the subject of the infringement claims, are currently being reexamined
by the U.S. Patent and Trademark Office. United States District Court for the District of Minnesota
recently ruled that the 5,612,524 patent was invalid and unenforceable. The Company plans to
appeal this decision. As a result of these actions, infringement revenue from patents 4,924,078 and
5,612,524 has ceased.
The Company has relied on The Matthews Group for funding. Through June 30, 2008, The Matthews
Group has funded the entire $2,000,000 of the original subscription receivable. The Company does
not believe going forward that The Matthews Group will continue to provide additional funding.
At June 30, 2008, the Company has $334,702 and $61,093 of cash and working capital, respectively.
The Company believes its cash and forecasted cash flow from operations will not be sufficient to
continue operations through fiscal 2009. The Company believes it will require additional funds to
continue its operations through fiscal 2009 and continue to develop its existing and future
projects by obtaining investment funds, 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.
Commitments and Contractual Obligations
The Company has one annual lease commitment of $37,800 for the corporate office building, which is
leased from Ms. Tran, that expires June 30, 2012. The commitment is for the corporate offices at
2445 Winnetka Avenue North, Golden Valley, Minnesota. The total amount of the 4-year lease
commitment is $151,200.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Critical Accounting Policies
Stock-Based Compensation:
The Company accounts for stock-based compensation under Statement of Financial Accounting Standards
(SFAS) No. 123(R), “Share-Based Payment” using the modified prospective application method. SFAS
No. 123(R) requires the cost of employee compensation paid with equity instruments to be measured
based on grant-date fair values and recognized over the vesting period.
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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, and identification card revenue (collectively, other), and
infringement 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 has received infringement revenue under its Exclusive License Agreement with VData LLC
(VData). VData is a wholly owned subsidiary of Acacia Research Corporation (NASDAQ: ACTG). The
Exclusive License Agreement with VData provides that all expenses related to the enforcement and
licensing of the patents is the responsibility of VData. The Company and VData share the net
proceeds arising from enforcement or licensing of the patents. As a result, all infringement
revenue is recognized at the time it is received. None of the infringement revenue is refundable
to any party once received.
ITEM 7 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our financial instruments include cash and cash equivalents. Our cash and cash equivalents are not
subject to significant interest rate risk due to the short maturities of these instruments. As of
June 30, 2008, the carrying value of our cash and cash equivalents approximated fair value. We have
in the past and may in the future obtain marketable debt securities (principally consisting of
commercial paper, corporate bonds and government securities) having a weighted average duration of
one year or less. Consequently, such securities would not be subject to significant interest rate
risk. Our main investment objectives are the preservation of investment capital and the
maximization of after-tax returns on our investment portfolio. We do not use derivative instruments
for speculative or investment purposes.
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ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
VERITEC, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 2008 AND 2007 TABLE OF CONTENTS
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Veritec, Inc. Golden Valley, Minnesota We have audited the accompanying consolidated balance sheets of Veritec, Inc. and Subsidiary
(Company) as of June 30, 2008 and 2007, and the related consolidated statements of operations,
stockholders’ equity and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of internal control
over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
The accompanying consolidated financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 2 to the consolidated financial statements,
the Company has suffered recurring losses from operations and has limited cash. These conditions
raise substantial doubt about the Company’s ability to continue as a going concern. Management’s
plans in regards to these matters are also described in Note 2. The consolidated financial
statements do not include any adjustments that might result from the outcome of this uncertainty.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Veritec, Inc. and Subsidiary as of June 30, 2008 and
2007, and the results of their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of America.
The Company is involved in various litigation matters, which could have a significant effect on the
Company (Note 10 — Contingencies).
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