Notes to Consolidated Financial Statements
(Unaudited)
|
NOTE 1:
|
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
Nature of Business
SanSal Wellness Holdings Inc. (the “Company”),
was incorporated as Armeau Brands Inc. in the State of Nevada on March 15, 2011. On October 13, 2017, the Company filed Amended
and Restated Articles of Incorporation with the Nevada Secretary of State changing the name from “Armeau Brands Inc.”
to “SanSal Wellness Holdings, Inc.” The Company’s business objectives are to produce natural rich-hemp products,
using strict natural protocols and materials yielding broad spectrum phytocannabinoid rich hemp oils, distillates and isolates.
The Company is licensed by the Colorado Department of Agriculture to grow industrial hemp pursuant to Federal law on its farm.
Effective September 27, 2017, the Company
acquired 100% of the issued and outstanding limited liability company membership interests of 271 Lake Davis Holdings LLC dba SanSal
Wellness (“271 Lake Davis”) in exchange for 46,800,000 (7,800,000 pre-split) restricted shares of the Company’s
common stock, which represented 100% of 271 Lake Davis’s total membership interests outstanding immediately following the
closing of the transaction. The transaction has been accounted for as a reverse merger, whereby 271 Lake Davis is the accounting
survivor and the historical financial statements presented are those of 271 Lake Davis.
Basis of Presentation
The accompanying unaudited consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America
for interim financial statements and with the instructions to Form 10-Q and Article 8 of Regulation S-X of the United States Securities
and Exchange Commission (the “SEC”). Accordingly, they do not contain all information and footnotes required by accounting
principles generally accepted in the United States of America for annual financial statements. In the opinion of the Company’s
management, the accompanying unaudited financial statements contain all the adjustments necessary (consisting only of normal recurring
accruals) to present the financial position of the Company as of Septemebr 30, 2018, and the results of operations and cash flows
for the periods presented. The results of operations for the three and nine months ended September 30, 2018, are not necessarily
indicative of the operating results for the full fiscal year or any future period. These unaudited consolidated financial statements
should be read in conjunction with the financial statements and related notes thereto included in the Form 10-K for the year ended
December 31, 2017, filed with the SEC on April 23, 2018.
Reclassifications
Certain reclassifications have been made
in the 2017 financial statements to conform to classifications used in 2018.
Principles of Consolidation
The accompanying consolidated financial
statements reflect the accounts of Sansal Wellness Holdings, Inc. and 271 Lake Davis Holdings and its wholly owned subsidiary,
Sansal, LLC. All significant inter-company accounts and transactions have been eliminated in consolidation.
See Accompanying Notes to Consolidated
Financial Statements (Unaudited)
SanSal Wellness Holdings, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
|
NOTE 1:
|
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
|
Use of Estimates
The preparation of financial statements
in conformity with accounting principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect certain reported amounts and disclosures. Actual results could differ from these estimates.
Fair Value Measurement
The Company has adopted the provisions
of ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value as used in numerous accounting pronouncements,
establishes a framework for measuring fair value and expands disclosure of fair value measurements.
The estimated fair value of certain financial
instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses are carried at historical
cost basis, which approximates their fair values because of the short-term nature of these instruments. The carrying amounts of
the Company’s short and long-term credit obligations approximate fair value because the effective yields on these obligations,
which include contractual interest rates taken together with other features such as concurrent issuances of warrants and/or embedded
conversion options, are comparable to rates of returns for instruments of similar credit risk.
ASC 820 defines fair value as the exchange
price 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. ASC 820 also establishes
a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:
Level 1 – quoted
prices in active markets for identical assets or liabilities
Level 2 – quoted prices
for similar assets and liabilities in active markets or inputs that are observable
Level 3 – inputs that
are unobservable (for example cash flow modeling inputs based on assumptions)
The Company does not have any assets or
liabilities measured at fair value on a recurring basis.
Cash and Cash Equivalents
The Company considers all highly liquid
investments with an original maturity of three months or less to be cash equivalents. At times, cash and cash equivalents may be
in excess of FDIC insurance limits.
SanSal Wellness Holdings, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
NOTE
1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition
In May 2014 the FASB issued Accounting
Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes all existing revenue recognition
requirements, including most industry specific guidance. This new standard requires a company to recognize revenues when it transfers
goods or services to customers in an amount that reflects the consideration that the company expects to receive for those goods
or services. The FASB subsequently issued the following amendments to ASU No. 2014-09 that have the same effective date and
transition date: ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations; ASU
No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing; ASU No. 2016-12,
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients; and ASU No. 2016-20, Technical
Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. The Company adopted these amendments with ASU
2014-09 (collectively, the new revenue standards).
The new revenue standards became effective
for the Company on January 1, 2018, and were adopted using the modified retrospective method. The adoption of the new revenue standards
as of January 1, 2018 did not change the Company’s revenue recognition as the majority of its revenues continue to be recognized
when the customer takes control of its product. As the Company did not identify any accounting changes that impacted the amount
of reported revenues with respect to its product revenues, no adjustment to retained earnings was required upon adoption.
Under the new revenue standards, the Company
recognizes revenues when its customer obtains control of promised goods or services, in an amount that reflects the consideration
which it expects to receive in exchange for those goods. The Company recognizes revenues following the five step model prescribed
under ASU No. 2014-09: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii)
determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize
revenues when (or as) we satisfy the performance obligation.
Revenues from product sales are recognized
when the customer obtains control of the Company’s product, which occurs at a point in time, typically upon delivery to the
customer. The Company expenses incremental costs of obtaining a contract as and when incurred if the expected amortization period
of the asset that it would have recognized is one year or less or the amount is immaterial.
Inventories
Inventories consist of growing and processed
plants and oils and are valued at the lower of cost or net realizable value. In evaluating whether inventories are stated at lower
of cost or net realizable value, management considers such factors as inventories in hand, estimated time to sell such inventories
and current market conditions. Write-offs for inventory obsolescence are recorded when, in the opinion of management, the value
of specific inventory items has been impaired.
SanSal Wellness Holdings, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
|
NOTE 1:
|
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
|
Property, Plant and Equipment
Purchase of property, plant and equipment
are recorded at cost. Improvements and replacements of property, plant and equipment are capitalized. Maintenance and repairs that
do not improve or extend the lives of property and equipment are charged to expense as incurred. When assets are sold or retired,
their cost and related accumulated depreciation are removed from the accounts and any gain or loss is reported in the
Consolidated
Statements of Operations
. Depreciation is provided over the estimated economic useful lives of each class of assets and is
computed using the straight-line method.
Impairment of Long-Lived Assets
The carrying value of long-lived assets
are reviewed when facts and circumstances suggest that the assets may be impaired or that the amortization period may need to be
changed. The Company considers internal and external factors relating to each asset, including cash flows, local market developments,
industry trends and other publicly available information. If these factors and the projected undiscounted cash flows of the Company
over the remaining amortization period indicate that the asset will not be recoverable, the carrying value will be adjusted to
the fair market value. The Company has determined that no impairment exists at September 30, 2018 and December 31, 2017.
Compensation and Benefits
The Company records compensation and benefits
expense for all cash and deferred compensation, benefits, and related taxes as earned by its employees. Compensation and benefits
expense also includes compensation earned by temporary employees and contractors who perform similar services to those performed
by the Company’s employees.
Stock-Based Compensation
The Company accounts for share-based payments
in accordance with ASC 718, “Compensation - Stock Compensation,” which requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the financial statements based on the grant date fair value of
the award. In accordance with ASC 718-10-30-9, “Measurement Objective – Fair Value at Grant Date,” the Company
estimates the fair value of the award using the Black-Scholes option pricing model for valuation of the share- based payments.
The Company believes this model provides the best estimate of fair value due to its ability to incorporate inputs that change over
time, such as volatility and interest rates, and to allow for actual exercise behavior of option holders.
SanSal Wellness Holdings, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
|
NOTE 1:
|
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
|
Stock-Based Compensation (Continued)
The simplified method is used to determine
compensation expense since historical option exercise experience is limited relative to the number of options issued. The compensation
cost is recognized ratably using the straight-line method over the expected vesting period.
The Company accounts for stock-based compensation
to other than employees in accordance with FASB ASC 505-50. Equity instruments issued to other than employees are valued at the
earlier of a commitment date or upon completion of the services, based on the fair value of the equity instruments, and is recognized
as expense over the service period.
Income Taxes
The Company was a Limited Liability Company
(“LLC”) for income tax purposes until September 27, 2017 when the transaction referred to in Note 1 discussed in the
“Nature of Business” occurred. In lieu of corporate income taxes, the owners were taxed on their proportionate shares
of the Company’s taxable income. Accordingly, no liability for federal or state income taxes and no provision for federal
or state income taxes have been included in the financial statements up to that date.
The Company accounts for income taxes under
ASC 740 Income Taxes. Under the asset and liability method of ASC 740, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the financial statements carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period the enactment
occurs. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that the Company
will not realize tax assets through future operations.
In accordance with Financial
Accounting Standards Board ASC Topic 740, Income Taxes, management evaluated the Company’s tax positions and concluded that
the Company had taken no uncertain tax positions that require adjustment to the financial statements to comply with the provisions
of this guidance. The Company is subject to routine audits by taxing jurisdictions; however, there are currently no audits for
any tax periods in progress.
Effective September 27, 2017 the Company
became taxed as a C-Corporation. Income tax benefits are recognized for income tax positions taken or expected to be taken in a
tax return, only when it is determined that the income tax position will more-likely than-not be sustained upon examination by
taxing authorities. The Company has analyzed tax positions taken for filings with the Internal Revenue Service and all tax jurisdictions
where it operates. The Company believes that income tax filing positions will be sustained upon examination and does not anticipate
any adjustments that would result in a material adverse effect on the Company’s financial condition, results of operations
or cash flows. Accordingly, the Company has not recorded any reserves, or related accruals for interest and penalties for uncertain
income tax positions at September 30, 2018 and December 31, 2017.
SanSal Wellness Holdings, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
|
NOTE 1:
|
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
|
Related Party Transactions
The Company follows FASB ASC subtopic 850-10,
Related Party Disclosures, for the identification of related parties and disclosure of related party transactions. Pursuant to
ASC 850-10-20, related parties include: a) affiliates of the Company; b) entities for which investments in their equity securities
would be required, absent the election of the fair value option under the Fair Value Option Subsection of Section 825–10–15,
to be accounted for by the equity method by the investing entity; c) trusts for the benefit of employees, such as pension and profit-sharing
trusts that are managed by or under the trusteeship of management; d) principal owners of the Company; e) management of the Company;
f) other parties with which the Company may deal if one party controls or can significantly influence the management or operating
policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate
interests; and g) other parties that can significantly influence the management or operating policies of the transacting parties
or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that
one or more of the transacting parties might be prevented from fully pursuing its own separate interests.
The consolidated financial statements shall
include disclosures of related party transactions, other than compensation arrangements, expense allowances, and other similar
items in the ordinary course of business. However, disclosure of transactions that are eliminated in the preparation of consolidated
or combined financial statements is not required in those statements. The disclosures shall include: a) the nature of the relationship(s)
involved; b) a description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for
each of the periods for which statements of operation are presented, and such other information deemed necessary to an understanding
of the effects of the transactions on the financial statements; c) the dollar amounts of transactions for each of the periods for
which statements of operations are presented and the effects of any change in the method of establishing the terms from that used
in the preceding period; and d) amounts due from or to related parties as of the date of each balance sheet presented and, if not
otherwise apparent, the terms and manner of settlement.
New Accounting Pronouncements
In July 2015, the FASB issued ASU 2015-11,
Inventory (Topic 330): Simplifying the Measurement of Inventory
. The amendments in the ASU require entities that measure
inventory using the first-in, first-out or average cost methods to measure inventory at the lower of cost and net realizable value.
Net realizable value is defined as estimated selling price in the ordinary course of business less reasonably predictable costs
of completion, disposal, and transportation. This ASU will be effective for the Company for fiscal years beginning after December
15, 2016. The Company has adopted ASU 2015-11 and it did not have a material effect on its financial statements.
SanSal Wellness Holdings, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
|
NOTE 1:
|
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
|
New Accounting Pronouncements (Continued)
In November 2015, the Financial Accounting
Standards Board issued Accounting Standards Update 2015-17,
Income Taxes (Topic 740): Balance Sheet Classification of Deferred
Taxes.
This Accounting Standards Update simplifies the presentation of deferred income taxes by eliminating the requirement
for entities to separate deferred tax liabilities and assets into current and noncurrent amounts in classified balance sheets.
Instead, it requires deferred tax assets and liabilities be classified as noncurrent in the balance sheet. Accounting Standards
Update 2015-17 is effective for financial statements issued for annual periods beginning after December 15, 2017. The Company early
adopted this standard on a retrospective basis all deferred income tax assets and liabilities have been presented as noncurrent.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
. The FASB issued ASU 2016-02 to increase transparency and comparability among Companies by recognizing
lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Certain qualitative
and quantitative disclosures are required, as well as a retrospective recognition and measurement of impacted leases. The new guidance
is effective for fiscal years and interim periods within those years beginning after December 15, 2018, with early adoption permitted.
Management is currently evaluating the standard.
Subsequent Events
The Company has evaluated subsequent events
through the date which the financial statements were available to be issued.
SanSal Wellness Holdings, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 2: INVENTORIES
Inventory consists of:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Inventory
|
|
|
|
|
|
|
Work In Progress
|
|
$
|
1,511,459
|
|
|
$
|
1,370,148
|
|
Finished Goods
|
|
|
122,433
|
|
|
|
44,802
|
|
Other
|
|
|
112,129
|
|
|
|
13,808
|
|
|
|
|
|
|
|
|
|
|
Inventory
|
|
$
|
1,746,021
|
|
|
$
|
1,428,758
|
|
During the periods ending September 30,
2018 and December 31, 2017, the Company realized a loss from destruction of plants in the amounts of $0 and $202,920, respectively.
NOTE 3: PROPERTY AND EQUIPMENT
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
Life
|
|
|
2018
|
|
|
2017
|
|
PROPERTY AND EQUIPMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
Land and Land Improvements
|
|
|
—
|
|
|
$
|
398,126
|
|
|
|
398,126
|
|
Building and Improvements
|
|
|
39
|
|
|
|
1,449,748
|
|
|
|
1,443,182
|
|
Greenhouse
|
|
|
39
|
|
|
|
693,987
|
|
|
|
693,987
|
|
Fencing and Irrigation
|
|
|
15
|
|
|
|
185,895
|
|
|
|
185,895
|
|
Machinery and Equipment
|
|
|
7
|
|
|
|
1,203,782
|
|
|
|
941,702
|
|
Furniture and Fixtures
|
|
|
7
|
|
|
|
224,682
|
|
|
|
216,116
|
|
Computer Equipment
|
|
|
5
|
|
|
|
20,053
|
|
|
|
20,053
|
|
Vehicles
|
|
|
5
|
|
|
|
31,161
|
|
|
|
16,161
|
|
|
|
|
|
|
|
$
|
4,207,434
|
|
|
$
|
3,915,222
|
|
Less Accumulated Depreciation
|
|
|
|
|
|
|
(500,133
|
)
|
|
|
(306,038
|
)
|
Property and Equipment
|
|
|
|
|
|
$
|
3,707,301
|
|
|
|
3,609,184
|
|
Total depreciation expense was $67,367
and $49,611 for the three month period and $194,095 and $148,833 for the nine month period ended September 30, 2018 and 2017, respectively.
SanSal Wellness Holdings, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 4: LONG-TERM DEBT
Long-term debt consisted of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Note Payable which requires monthly payments of $1,618 including interest at 6.00% per annum until February 1, 2020 when the balance is due in full. The note is secured by specific assets of the Company.
|
|
$
|
103,800
|
|
|
$
|
112,903
|
|
|
|
|
|
|
|
|
|
|
Capital Lease Payable which requires monthly payments of $32,850 until May 2018, when the Company may purchase the equipment for $1. The Company made no payments since August 2016 and is currently in default with the lessor.
|
|
|
538,254
|
|
|
|
538,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
642,054
|
|
|
|
651,157
|
|
Less Current Portion
|
|
|
(541,578
|
)
|
|
|
(551,191
|
)
|
Long-Term Debt - net of current portion
|
|
$
|
100,476
|
|
|
$
|
99,966
|
|
Future principal payments for the next
5 years are as follows for the years ended December 31:
|
|
2018
|
|
|
$
|
541,578
|
|
|
|
2019
|
|
|
|
13,735
|
|
|
|
2020
|
|
|
|
86,741
|
|
|
|
|
|
$
|
642,054
|
|
SanSal Wellness Holdings, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 5: STOCK-BASED COMPENSATION
The Company approved their 2017 Incentive
Stock Plan on September 27, 2017 (the “Incentive Plan”) which authorizes the Company to grant or issue non-qualified
stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units and other equity awards
up to a total of 7.5 million shares. Under the terms of the Incentive Plan, awards may be granted to our employees, directors
or consultants. Awards issued under the Incentive Plan vest as determined by the Board of Directors or any of the Committees appointed
under the Incentive Plan at the time of grant.
The Company’s outstanding stock options
have a 10-year term. Outstanding non-qualified stock options granted to employees and a consultant vested immediately. Outstanding
incentive stock options issued to employees vest over a three-year period. The incentive stock options granted vest based
solely upon continued employment (“time-based”). The Company’s time-based share awards that vest in their entirety at
the end of three-year periods, time-based share awards where 33.3% of the award vests on each of the three anniversary
dates.
Stock-based compensation expense was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30:
|
|
|
September 30:
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Non-Qualified Stock Options - Immediate
|
|
$
|
2,887
|
|
|
$
|
—
|
|
|
$
|
8,662
|
|
|
$
|
—
|
|
Incentive Stock Options - Time Bases
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total Stock-based Compensation Expense
|
|
$
|
2,887
|
|
|
$
|
—
|
|
|
$
|
8,662
|
|
|
$
|
—
|
|
Stock option activity was as follows in the periods ended September 30, 2018 and December 31, 2017:
|
|
|
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
|
|
Stock
|
|
|
Average
|
|
|
Average
|
|
|
|
|
Options
|
|
|
Exercise
|
|
|
Remaining
|
|
Outstanding at December 31, 2017
|
|
|
|
533,336
|
|
|
$
|
0.50
|
|
|
|
9.75 Years
|
|
Granted
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Forfeited/Canceled
|
|
|
|
(25,000
|
)
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2018
|
|
|
|
508,336
|
|
|
$
|
0.50
|
|
|
|
9 Years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested at September 30, 2018
|
|
|
|
425,001
|
|
|
$
|
0.50
|
|
|
|
9 Years
|
|
Exercisable at September 30, 2018
|
|
|
|
425,001
|
|
|
$
|
0.50
|
|
|
|
9 Years
|
|
SanSal Wellness Holdings, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 5: STOCK BASED COMPENSATION
(CONTINUED)
The Company estimated the fair value of
each stock option on the date of grant using the Black Scholes valuation model with the following assumptions:
Valuation Assumptions
|
|
Risk-free interest rate
|
2.14% – 2.31%
|
Expected dividend yield
|
0%
|
Expected stock price volatility
|
105%
|
Expected life of stock options (in years)
|
10
|
NOTE 6: OPERATING LEASES
On January 15, 2017, the Company entered
an agreement with Pueblo, CO Board of Water Works to lease water for the Company’s cultivation process. The agreement went
into effect as of November 1, 2016 with a term of 10 years expiring on October 31, 2026, with an option to extend the lease upon
expiration for 10 additional years. This agreement replaced previously entered agreements with Pueblo, CO Board of Water Works.
The lease requires annual non-refundable minimum service fees of $15,000 and a usage charge of $1,063 per acre for 30 acres. The
minimum service fees and usage charges are subject to escalators for each year based upon percentage increases of Pueblo, CO Board
of Water Works rates from the previous calendar year. Total water lease expense was $11,724 for the three month periods and $35,172
for the nine month periods ended September 30, 2018 and 2017, respectively.
As of September 30, 2018 and December 31,
2017, operating leases have no minimum rental commitments.
NOTE 7: COMMON STOCK
Effective September 27, 2017, the Company
acquired 100% of the issued and outstanding limited liability company membership interests of 271 Lake Davis Holdings LLC dba SanSal
Wellness (“271 Lake Davis”) in exchange for 46,800,000 (7,800,000 pre-split) restricted shares of the Company’s
common stock.
On November 9, 2017, Financial Industry
Regulatory Authority authorized a 6-for-1 forward split of the Company’s issued and outstanding shares of common stock in
the form of a stock dividend. Accordingly, stockholders of the Company as of the record date of November 9, 2017 received five
additional shares of common stock for each share then held. All relevant information relating to number of shares and per share
information have been retrospectively adjusted to reflect the split for all periods presented.
In 2017 the Company issued 1,395,000 shares
of common stock for proceeds of $700,500.
SanSal Wellness Holdings, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 7: COMMON STOCK (CONTINUED)
On May 18, 2018 the Company entered
into a convertible promissory note in the amount of $175,000 with an automatic conversion feature if the company consummates
a qualified financing where the principal and all accrued but unpaid interest shall automatically convert into shares with a
20% discount to the effective per share offering price. On May 30, 2018 the note and accrued interest converted to 2,187,500
shares of common stock.
In 2018 the Company issued 29,514,000 shares
of common stock for proceeds of $3,027,000 and 225,000 shares of common stock for marketing services valued at $38,000.
NOTE 8: INCOME TAX
The reconciliation of income tax computed at the Federal statutory rate to the provision for income taxes from continuing
operations is as follows:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2018
|
|
Federal Taxes (credits) at statutory rates
|
|
$
|
(219,000
|
)
|
|
$
|
(494,000
|
)
|
Permanent differences
|
|
|
—
|
|
|
|
—
|
|
State and local taxes, net of Federal benefit
|
|
$
|
(46,000
|
)
|
|
$
|
(77,000
|
)
|
Change in valuation allowance
|
|
|
265,000
|
|
|
|
571,000
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Components
of deferred tax assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
|
December 31,
|
|
|
|
|
2018
|
|
|
|
2017
|
|
Deferred Tax Assets;
|
|
|
|
|
|
|
|
|
Net Operating Loss Carryforwards
|
|
$
|
802,000
|
|
|
$
|
397,000
|
|
Lease Payable
|
|
|
142,000
|
|
|
|
—
|
|
Accrued Related Party Expenses
|
|
|
36,000
|
|
|
|
—
|
|
Inventory Reserve
|
|
|
22,000
|
|
|
|
—
|
|
Accrued Officer Salary
|
|
|
6,000
|
|
|
|
—
|
|
Total Deferred Tax Assets
|
|
|
1,008,000
|
|
|
|
397,000
|
|
Valuation Allowance
|
|
|
(733,000
|
)
|
|
|
(162,000
|
)
|
|
|
|
|
|
|
|
|
|
Total Deferred Tax Assets net of Valuation Allowance
|
|
$
|
275,000
|
|
|
$
|
235,000
|
|
Deferred Tax Liabilities;
|
|
|
—
|
|
|
|
—
|
|
Depreciation and Amortization
|
|
|
245,000
|
|
|
|
235,000
|
|
Prepaid Expense
|
|
|
30,000
|
|
|
|
—
|
|
Total Deferred Tax Liabilities
|
|
|
275,000
|
|
|
|
235,000
|
|
|
|
|
|
|
|
|
|
|
Net Deferred Tax Assets
|
|
$
|
—
|
|
|
$
|
—
|
|
SanSal Wellness Holdings, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 8: INCOME TAX (CONTINUED)
The Company has approximately $3,000,000
net operating loss carryforwards that are available to reduce future taxable income. Those NOLs begin to expire in 2038. In assessing
the realization of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future
taxable income and tax planning strategies in making this assessment. Based on the assessment, management has established a full
valuation allowance against all of the deferred tax assets for every period because it is more likely than not that all of the
deferred tax assets will not be realized.
The Company’s deferred tax liability
associated with timing differences related to depreciation and amortization includes $188,000 of liability resulting from tax depreciation
deducted in excess of GAAP depreciation prior to the Company becoming taxed as a C-Corporation.
The Company files income tax returns in
the U.S. federal jurisdiction, and the state of Colorado.
The Company adopted the provisions of FASB
ASC 740, A
ccounting for Uncertainty in Income Taxes
. Management evaluated the Company’s tax positions and concluded
that the Company had taken no uncertain tax positions that require adjustment to the financial statements to comply with the provisions
of this guidance. The Company has no significant adjustments as a result of the implementation of FASB ASC 740.
NOTE 9: CONCENTRATIONS
The Company had two customers in the nine
months ended September 30, 2018 accounting for 41% and 12% of total sales. For the nine months ended September 30, 2017, one customer
accounted for 74% of sales.
The Company had one customer in the three
months ended September 30, 2018 accounting for 33% of total sales. For the three months ended September 30, 2017, one customer
accounted for 81% of sales.
The Company had three customers at September
30, 2018 accounting for 37%, 22%, and 11% or accounts receivable. At December 31, 2017, one customer accounted for 79% of accounts
receivable.
NOTE 10: GOING CONCERN
The accompanying financial statements have
been prepared in conformity with accounting principles generally accepted in the United States, which contemplate continuation
of the Company as a going concern. However, the Company has sustained substantial losses from operations since its inception. As
of and for the nine months ended September 30, 2018, the Company had an accumulated deficit of $5,768,728, and a net loss of $1,677,711.
These factors, among others, raise substantial doubt about the ability of the Company to continue as a going concern. Continuation
as a going concern is dependent on the ability to raise additional capital and financing, though there is no assurance of success.
SanSal Wellness Holdings, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 10: GOING CONCERN (CONTINUED)
The Company recently launched a new rebranded
line of hemp oil and extract products as part of the Company’s increased focus on sales and marketing. The rebranded product
line, including new trade name and packaging, is being used to expand the company’s potential customer base. The newly branded
products became available to consumers, retailers, and distributors in the second quarter of 2018, and include vegan capsules,
tinctures, lotions, salves, and oral syringes in various potency levels and flavors.
Currently, the Company incorporates an
aggressive marketing plan to compete in the Cannabinoid industry. To become market leaders in the market, the Company will use
three primary departments to market its products including: web-based marketing, traditional marketing, and medical marketing departments.
NOTE 11: RELATED PARTY
The Company incurred $78,025 and $72,695
of related party legal expenses during the three months period and $179,245 and $116,955 during the nine month period ended September
30, 2018 and 2017, respectively for legal services. As of September 30, 2018 and December 31, 2017, the Company had related party
legal accruals for $116,955 and $93,220, respectively.
The Company entered into various note payables
with stockholders of the company between June 2017 and June 2018. The notes bear interest between 2.00% and 3.00% per annum. Principal
and interest are payable in one installment due January 1, 2018. The principal balance due on these notes was $945,324 and $1,030,080
as of September 30, 2018 and December 31, 2017. Interest accrued was $25,122 and $16,230 as of September 30, 2018 and December
31, 2017, respectively. The Company issued stock incentives to various directors and employees. Refer to Note 5 for additional
details.
NOTE 12: SUBSEQUENT EVENTS
Subsequent
to September 30, 2018, 7,825,008 shares have been issued upon the exercise of warrants sold in the private offering described
in Note 7 for proceeds of $1,173,751
.