Results of Operations - June 30, 2012 compared to June 30, 2011

We had a net loss of $846,461 in the fiscal year ended June 30, 2012 compared to a net loss of $990,197 in the fiscal year ended June 30, 2011.

Revenues



Details of revenues are as follows:



                         Year Ended June 30,         Increase (Decrease)
                         2012          2011            $              %

License               $ 441,157     $ 819,486     $ (378,329 )       (46.2 )
Hardware                 20,010        49,045        (29,035 )       (59.2 )
Identification Card      11,936         7,722          4,214          54.6
Debit Card Revenue      113,681         9,153        104,528       1,142.0

Total Revenues        $ 586,784     $ 885,406     $ (298,622 )       (33.7 )

License and hardware revenues are derived from our Product Identification systems sold principally to customers in the LCD manufacturing industry. Identification Card revenues in these periods were a result of sales of identification card systems.

The license revenue decrease was mainly attributable to reduction in 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 low demand for product identification product licenses in the LCD industry. A large portion of our license sales are concentrated in the Asia-Pacific market, which decreased $549,394 in Taiwan, Germany, and Korea. The largest increase of our license sales for the year ended June 30, 2012, was in China, which increased $15,150.

The significant increase in debit card revenue during the fiscal year ended June 30, 2012 compared to prior year was mainly attributable to large orders from a customer for the Company's prepaid debit card.

Cost of Goods Sold

Cost of sales for the year ended June 30, 2012, totaled $244,687 and for the year ended June 30, 2011, cost of sales was $347,400, a decrease of $102,713. As a percentage of revenue, for the year ended June 30, 2012, cost of sales was 41.7% compared to 39.2% for the year ended June 30, 2011. The increase in the cost of sales as a percentage of revenue was principally the result of decreases in revenues. Charges of $216,431 and $277,755 for the years ended June 30, 2012 and 2011, respectively 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 88% and 80% of the total cost of goods sold for the years ended June 30, 2012 and 2011, respectively. Included in the cost of goods sold for the year ended June 30, 2012, were network and consulting fees of $1,323 for the mobile debit card, and freight and handling expense of $2,795. Cost of goods sold associated with the license, hardware and identification revenue was $28,257 or 4.8% of total licensing, hardware, identification card revenue, and debit card revenue for the year ended June 30, 2012, compared to $69,644 or 7.9% for the year ended June 30, 2011.

Operating Expenses

General and administrative expenses for the fiscal year ended June 30, 2012 were $605,721, compared to $986,130 for fiscal year ended June 30, 2011, a decrease of $380,409. The decrease was the result of decreases in salaries and payroll related costs by $33,640, health insurance by $17,804, audit fees by $39,261, depreciation expense by $12,788, legal fees by $179,558, patent renewal costs by $26,533, travel costs by $7,811, bad debt expense by $54,546, and payroll interest and penalties by $23,586 compared to the year ended June 30, 2011. Significant increases during the year ended June 30, 2012, compared to the prior year included increases in administrative consultants' expenses by $30,611 and bank charges by $3,808.

Sales and marketing expense for the fiscal year ended June 30, 2012 was $144,965 compared to $162,614 for the fiscal year ended June 30, 2011, a decrease of $17,649. The Company's sales and marketing payroll and related costs decreased by $11,892 for the year ended June 30, 2012 as a result of the Company's cost reduction strategy.

Research and development expense for the year ended June 30, 2012 totaled $206,748 versus $219,334 for the year ended June 30, 2011 a decrease of $12,586. This cost savings was the result of reduction in research and development staff level. Consultant and project costs were $136,889 for the year ended June 30, 2012 compared to $58,013 for the year ended June 30, 2011, a difference of $78,876.

Other Income (Expense)

Interest income for the fiscal year ended June 30, 2012 was $111 compared to $0 for the fiscal year ended June 30, 2011, an increase of $111. The increase was a result of the interest earned on the Company's restricted cash with one financial institution. Interest expense for the fiscal year ended June 30, 2012 was $231,235 compared to $160,125 in fiscal year 2011 an increase of $71,110. Apart from the additional financing activities in fiscal 2012 that attracted higher interest rates most of the increased interest expense over prior year was due to the amortization of discount on notes payable.

Capital Expenditures and Commitments

We made no capital purchases in fiscal 2012 and 2011, respectively.

Liquidity

Our increase in cash and cash equivalent to $62,115 at June 30, 2012 compared to $14,996 at June 30, 2011 was the result of $471,546 used in operating activities; $11,668 used in investing activities; and $530,333 provided by financing activities. Net cash used in operations during 2012 was $471,546 compared with $91,619 used in operations during the same period in 2011. Cash used in operations during 2012 was primarily due to the net loss in the period. Net cash used in investing activities of $11,668 during 2012 compared with $60,000 during 2011 was primarily the result of payment on note receivable. Net cash provided by financing activities of $530,333 during 2012 was primarily due to proceeds from notes payable of $535,217 and payment of $4,884 on note payable. During the same period in 2011, the net cash provided by financing activities of $134,700 was from proceeds from notes payable of $134,700.

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. During the year ended June 30, 2012, the Company had a net loss of $846,461 and used cash in operations of $471,546. At June 30, 2012, the Company had a working capital deficit of $4,283,981 and a stockholders' deficiency of $4,283,337. The Company is also delinquent in payment of certain amounts due of $521,568 for payroll taxes and accrued interest and penalties as of June 30, 2012. The Company believes its cash and forecasted cash flow from operations will not be sufficient to continue operations through fiscal 2013 without continued external investment. The Company believes it will require additional funds to continue its operations through fiscal 2013 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. Our auditor has issued a "going concern" qualification as part of their opinion in the Audit Report for the year ended June 30, 2012.

The Company has traditionally been dependent on The Matthews Group, LLC, a related party, for its financial support. The Matthews Group is owned 50% by Van Tran, the Company's CEO/Executive Chair and a director, and 50% by Larry Johanns, a significant Company stockholder. In fiscal 2012, The Matthews Group loaned the Company $46,000 mostly in the form of convertible demand notes payable. Through June 30, 2011 The Matthews Group, LLC, Company executives, a member of the Company's Board of Directors, and other individuals loaned $2,240,661 to the Company. Included in this amount was $550,000 made under a subscription agreement form of private offering. Subsequent to fiscal 2012 and through October 2012 the Company issued to The Matthews Group and certain individual unsecured and convertible demand notes totaling $81,000 at an interest rate of 10% per annum. However additional capital most likely will be required to continue the Company's business, and the Company has no guarantee that The Matthews Group, LLC, the executives, Board member, and other individuals will continue to provide funding. As of June 30, 2012, the Company had $62,115 in cash and a ($4,283,981) working capital deficit. The Company will require additional funds to continue its operations through fiscal year 2013 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 be unable to continue in business.

Commitments and Contractual Obligations

The Company has one annual lease commitment of $50,400 for the corporate office building, which is leased from Ms. Tran, our chief executive officer, that expired June 30, 2012 which was automatically extended for two one-year term. The commitment is for the corporate offices at 2445 Winnetka Avenue North, Golden Valley, Minnesota. The total amount of the two-year lease commitment is $100,800.

VTFS entered into a thirteen-month processing center contract beginning April 19, 2011, with monthly commitments of approximately $10,434. The term of the agreement is through May 2012 with automatic monthly extensions.

Subsequent to the fiscal year ended June 30, 2012, the Company entered into consulting and confidentiality agreements with various entities. There was no future commitment under these agreements. The Company also entered into sales and confidentiality agreements with various entities for the marketing of its mobile debit card in return for commissions from sales revenue from its debit card transactions. Subsequent to year end and through October 2012, the Company borrowed additional $81,000 with annual interest at 10%, due to a related party and an individual, convertible into common stock at prices ranging from $0.10 to $0.15 per share, and due on demand.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Critical Accounting Policies

Stock-Based Compensation:

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

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

Revenue Recognition

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

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

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

Recently Issued Accounting Standards

In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-4, which amends the Fair Value Measurements Topic of the Accounting Standards Codification (ASC) to help achieve common fair value measurement and disclosure requirements in U.S. GAAP and IFRS. ASU No. 2011-4 does not require additional fair value measurements and is not intended to establish valuation standards or affect valuation practices outside of financial reporting. The ASU is effective for interim and annual periods beginning after December 15, 2011. The Company will adopt the ASU as required. The ASU will affect the Company's fair value disclosures, but will not affect the Company's results of operations, financial condition or liquidity.

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

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