VFRM Veritas Farms Inc (QB)

Notes to Consolidated Financial Statements  

(Unaudited)   

NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business  

SanSal Wellness Holdings Inc. (formerly Armeau Brands Inc.), (the “Company”), was incorporated in the State of Nevada on March 15, 2011. 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 7,800,000 restricted shares of the Company’s common stock, which represented 100% of 271 Lake Davis’s total member units 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. 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.” 

Sansal, LLC was a wholly owned subsidiary that was merged into 271 Lake Davis Holdings, LLC in January 2016.  

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 September 30, 2017, the Company had an accumulated deficit of $2,572,904 and a working capital deficit of $125,990. These factors, among others, raise substantial doubt about the ability of the Company to continue as a going concern Our continuation as a going concern is dependent on our ability to raise additional capital and financing, though there is no assurance we will be successful in our efforts.

Basis of Presentation  

The accompanying unaudited 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 September 30, 2017, 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, 2017, are not necessarily indicative of the operating results for the full fiscal year or any future period.

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. 

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.

NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 

Fair Value Measurement  

The estimated fair values of the Company’s short-term financial instruments, including receivables and payables arising in the ordinary course of business, approximate their individual carrying amounts due to the relatively short period of time between their origination and expected realization. 

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.

Revenue Recognition  

The Company recognizes revenue in accordance with Accounting Standards Codification No. 605, “Revenue Recognition” (“ASC-605”), ASC-605 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. The Company will defer any revenue for which the product or servicers has not been delivered or provided or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or no refund will be required. 

Inventories  

Inventories consist of growing and processed plants and oils and are valued at the lower of cost or market. In evaluating whether inventories are stated at lower of cost or market, 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.  

Property and Equipment  

Purchase of property and equipment are recorded at cost. Improvements and replacements of property 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 Statements of Income . Depreciation is provided over the estimated economic useful lives of each class of assets and is computed using the straight-line method. 

Estimated economic useful lives of property and equipment range from 3 to 39 years.

NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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. No adjustment was considered necessary for the nine month period ended September 30, 2017 and 2016, respectively.

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  

Certain employees, officers, directors, and consultants of the Company participate in various incentive plans that provide for granting stock options and restricted stock awards. Stock options vest in equal increments over a three-year period and expire on the tenth anniversary following the date of grant. Restricted stock awards vest 100% at the grant date.

The Company recognizes stock-based compensation for equity awards granted to employees, officers, directors and consultants as compensation and benefits expense in the consolidated statements of operations. The fair value of stock options is estimated using a Black-Scholes valuation model on the date of grant. The fair value of restricted stock awards is equal to the closing price of the Company’s stock on the date of grant. Stock-based compensation is recognized over the requisite service period of the individual awards, which generally equals the vesting period.

The Company recognizes stock-based compensation for equity awards granted to consultants as selling, general and administrative expense in the consolidated statements of operations. The fair value of stock options is estimated using a Black-Scholes valuation model on the date of grant and unvested awards are revalued at each reporting period. The fair value of restricted stock awards is equal to the closing price of the Company’s stock on the date of grant multiplied by the number of shares awarded. Stock-based compensation is recognized over the requisite service period of the individual awards, which generally equals the vesting period.

NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Income Taxes  

The Company was a Limited Liability Company (“LLC”) for income tax purposes until September 27, 2017 when the reverse merger took place as discussed in the “Nature of Business” footnote above. 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.

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 was taxes 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, 2017.

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.

NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Related Party Transactions (Continued)  

The consolidated financial statements shall include disclosures of material 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.

Subsequent Events  

The Company has evaluated subsequent events through the date which the financial statements were available to be issued.

Total depreciation expense was $49,611 and $17,944 for the 3 month period and $148,833 and $53,980 for the nine month period ended September 30, 2017 and 2016, respectively.

Future principal payments for the next 5 years are as follows for the years ended December 31:

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 1.250 million shares. The Company has not granted any stock appreciation rights, restricted stock, restricted stock units or other equity options under the Incentive Plan. 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:

Stock option activity was as follows in nine months ended September 30, 2017:

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 and $18,693 for the three month periods and $35,172 and $47,587 for the nine month periods ended September 30, 2017 and 2016, respectively. 

On July 12, 2016, the Company entered an agreement to lease office space for a sales office for a term of 15 months expiring on October 31, 2017. The agreement requires monthly lease payments of $4,078 and included three free months of rent forgiven. 

On November 9, 2016, the Company entered an agreement to lease office space for a sales office for a term of 7 months expiring on May 31, 2017. The lease required monthly lease payments of $704 and was not renewed. 

As of September 30, 2017, minimum rental commitments under the operating leases are as follows:  

NOTE 7: RELATED PARTY 

The Company entered into various note payables with stockholders of the company between March 2017 and September 2017. The notes bear interest between 2.00% and 3.00% per annum. Principal and interest is payable in one installment due upon the earlier of 120 days after the Company consummating a reverse merger or nine months after the date of the note. The balances due on these notes is $1,030,080 as of September 30, 2017. 

NOTE 8: COMMON STOCK

See Note 1 regarding shares issued in reverse merger. 

On September 27, 2017 the Company issued 340,000 shares for proceeds of $150,030. 

See note 10 regarding the stock split. 

NOTE 9: SUPPLEMENTAL CASHFLOW DISCLOSURE 

The Company paid interest of $0 and $7,203 for the three month periods and $8,205 and $19,987 during the nine month periods ended September 30, 2017 and 2016, respectively. 

The Company paid no income taxes during the three month periods ended September 30, 2017 and 2016. 

In February 2017, the Company distributed land held for investment of $69,000 and the related mortgage note payable with a balance of $53,603 to one of the members.