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 June 30, 2018, and the results of operations and cash flows for the periods
presented. The results of operations for the three and six months ended June 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.
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.
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).
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 (Continued)
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 June 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 June 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)
Inventory consists of:
|
|
June 30,
|
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Inventory
|
|
|
|
|
|
|
Work In Progress
|
|
$
|
1,588,506
|
|
|
$
|
1,370,148
|
|
Finished Goods
|
|
|
43,121
|
|
|
|
44,802
|
|
Other
|
|
|
—
|
|
|
|
13,808
|
|
|
|
|
|
|
|
|
|
|
Inventory
|
|
$
|
1,631,627
|
|
|
$
|
1,428,758
|
|
During the periods ending June 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
|
|
|
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
Life
|
|
|
2018
|
|
|
2017
|
|
PROPERTY
AND EQUIPMENT
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
and Land Improvements
|
|
|
—
|
|
|
$
|
398,126
|
|
|
|
398,126
|
|
Building
and Improvements
|
|
|
39
|
|
|
|
1,443,182
|
|
|
|
1,443,182
|
|
Greenhouse
|
|
|
39
|
|
|
|
693,987
|
|
|
|
693,987
|
|
Fencing
and Irrigation
|
|
|
15
|
|
|
|
185,895
|
|
|
|
185,895
|
|
Machinery
and Equipment
|
|
|
7
|
|
|
|
941,702
|
|
|
|
941,702
|
|
Furniture
and Fixtures
|
|
|
7
|
|
|
|
216,116
|
|
|
|
216,116
|
|
Computer
Equipment
|
|
|
5
|
|
|
|
20,053
|
|
|
|
20,053
|
|
Truck
|
|
|
5
|
|
|
|
16,161
|
|
|
|
16,161
|
|
|
|
|
|
|
|
$
|
3,915,222
|
|
|
$
|
3,915,222
|
|
Less
Accumulated Depreciation
|
|
|
|
|
|
|
(432,766
|
)
|
|
|
(306,038
|
)
|
Property
and Equipment
|
|
|
|
|
|
$
|
3,482,456
|
|
|
|
3,609,18
4
|
|
Total depreciation expense was $63,436 and $49,611 for the three
month period and $126,728 and $99,222 for the six month period ended June 30, 2018 and 2017, respectively.
SanSal Wellness Holdings, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
Long-term debt consisted of the following:
|
|
June
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.
|
|
$
|
105,418
|
|
|
$
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
643,672
|
|
|
|
651,157
|
|
Less
Current Portion
|
|
|
(544,852
|
)
|
|
|
(551,191
|
)
|
Long-Term
Debt - net of current portion
|
|
$
|
98,820
|
|
|
$
|
99,96
6
|
|
Future principal payments for the next 5 years are as follows for the years ended December 31:
2018
|
|
|
$
|
544,852
|
|
2019
|
|
|
|
13,735
|
|
2020
|
|
|
|
85,085
|
|
|
|
|
$
|
643,672
|
|
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
|
|
|
Six Months Ended
|
|
|
|
June 30:
|
|
|
June 30:
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Non-Qualified Stock Options - Immediate
|
|
$
|
50,564
|
|
|
$
|
—
|
|
|
$
|
101,128
|
|
|
$
|
—
|
|
Incentive Stock Options - Time Bases
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total Stock-based Copensation Expense
|
|
$
|
50,564
|
|
|
$
|
—
|
|
|
$
|
101,128
|
|
|
$
|
—
|
|
Stock option activity was as follows in the periods ended June
30, 2018 and December 31, 2017:
|
|
|
Stock
Options
|
|
|
Weighted-
Average
Exercise
|
|
|
Weighted-Average
Remaining
|
Outstanding at December 31, 2017
|
|
|
|
533,336
|
|
|
$
|
0.50
|
|
|
$9.75 Years
|
Granted
|
|
|
|
—
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
—
|
|
|
|
|
|
|
|
Forfeited/Canceled
|
|
|
|
(25,000
|
)
|
|
$
|
0.50
|
|
|
|
Outstanding at June 30, 2018
|
|
|
|
508,336
|
|
|
$
|
0.50
|
|
|
9.25 Years
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested at June 30, 2018
|
|
|
|
425,001
|
|
|
$
|
0.50
|
|
|
9.25 Years
|
Exercisable at June 30, 2018
|
|
|
|
425,001
|
|
|
$
|
0.50
|
|
|
9.25 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 period and $23,448 for the six month period ended June 30, 2018 and 2017, respectively.
As
of June 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.
During
the six month periods ended June 30, 2018 the Company issued 14,114,000 common stock shares in exchange for cash payment of $699,443,
subscription receivable of $797,934, and marketing services of $20,500 for a total purchase price of $1,517,877. The outstanding
balance due is presented on the balance sheet as a Subscription Receivable.
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 equity in the form of 2,191,096 shares of common stock.
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
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2018
|
|
|
2018
|
|
Federal Taxes (credits) at statutory rates
|
|
$
|
(176,000
|
)
|
|
$
|
(300,000
|
)
|
Permanent differences
|
|
|
—
|
|
|
|
—
|
|
State and local taxes, net of Federal benefit
|
|
$
|
(20,000
|
)
|
|
$
|
(36,000
|
)
|
Change in valuation allowance
|
|
|
196,000
|
|
|
|
336,000
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Components of deferred tax assets are as follows:
|
|
|
June 30,
|
|
|
|
December 31,
|
|
|
|
|
2018
|
|
|
|
2017
|
|
Deferred Tax Assets;
|
|
|
|
|
|
|
|
|
Net Operating Loss Carryforwards
|
|
$
|
440,000
|
|
|
$
|
397,000
|
|
Lease Payable
|
|
|
142,000
|
|
|
|
—
|
|
Accrued Related Party Expenses
|
|
|
21,000
|
|
|
|
—
|
|
Inventory Reserve
|
|
|
22,000
|
|
|
|
—
|
|
Accrued Officer Salary
|
|
|
53,000
|
|
|
|
—
|
|
Total Deferred Tax Assets
|
|
|
678,000
|
|
|
|
397,000
|
|
Valuation Allowance
|
|
|
(498,000
|
)
|
|
|
(162,000
|
)
|
|
|
|
|
|
|
|
|
|
Total Deferred Tax Assets net of Valuation Allowance
|
|
$
|
180,000
|
|
|
$
|
235,000
|
|
Deferred Tax Liabilities;
|
|
|
—
|
|
|
|
—
|
|
Depreciation and Amortization
|
|
|
175,000
|
|
|
|
235,000
|
|
Prepaid Expense
|
|
|
5,000
|
|
|
|
—
|
|
Total Deferred Tax Liabilities
|
|
|
180,000
|
|
|
|
235,000
|
|
Net Deferred Tax Assets
|
|
$
|
—
|
|
|
$
|
—
|
|
The
Company has approximately $1,600,000 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.
SanSal
Wellness Holdings, Inc. and Subsidiary
Notes
to Consolidated Financial Statements
(Unaudited)
NOTE
8: INCOME TAX (CONTINUED)
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
On
December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”) was signed into law, making significant
changes to the Internal Revenue Code. Changes include, but are not limited to, a federal corporate tax rate decrease from 35%
to 21% for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system
to a territorial system and a one-time transition tax on the mandatory deemed repatriation of foreign earnings. The Company has
estimated its provision for income taxes in accordance with the 2017 Tax Act and the guidance available as of the date of March
30, 2018, but has kept the full valuation allowance. As a result, the Company has recorded no income tax expense in the fourth
quarter of 2017, the period in which the 2017 Tax Act was enacted.
On
December 22, 2017, the Securities and Exchange Commission published Staff Accounting Bulletin No. 118 (“SAB 118”),
which addressed the application of GAAP in situations where the Company does not have the necessary information (including computations)
available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the 2017 Tax
Act. The deferred tax expense to be recorded in connection with the remeasurement of deferred tax assets is to be a provisional
amount and a reasonable estimate at June 30, 2018, based upon the best information currently available. The ultimate result may
differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in the interpretations
and assumptions that the Company has made, additional regulatory guidance that may be issued, and actions that the Company may
take as a result of the 2017 Tax Act. Any subsequent adjustment to these amounts will be recorded in current tax expense in the
quarter of 2018 when the analysis is complete. The accounting is expected to be
complete when
the Company’s 2017 federal corporate income tax return is filed in 2018.
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.
SanSal
Wellness Holdings, Inc. and Subsidiary
Notes
to Consolidated Financial Statements
(Unaudited)
NOTE
9: CONCENTRATIONS
The
Company had two customers in the six months ended June 30, 2018 accounting for 45% and 15% of total sales. For the six months
ended June 30, 2017, two customers accounted for 66% and 12% of sales.
The
Company had two customers in the three months ended June 30, 2018 accounting for 37% and 12% of total sales. For the three months
ended June 30, 2017, two customers accounted for 81% and 13% of sales.
The
Company had two customers at June 30, 2018 accounting for 60% and 13% or accounts receivable. At June 30, 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 six months ended June 30, 2018, the Company had an accumulated deficit
of $4,772,446, a net loss of $681,429, and a working capital deficit of $183,741. 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.
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 developed 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 will 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 $62,020 and $0 of legal expenses during the three months period and $101,220 and $0 during the six month period
ended June 30, 2018 and 2017, respectively for legal services. As of June 30, 2018 and December 31, 2017, the Company had related
party legal accruals for $60,440 and $93,220, respectively.
SanSal
Wellness Holdings, Inc. and Subsidiary
Notes
to Consolidated Financial Statements
(Unaudited)
NOTE
11: RELATED PARTY (CONTINUED)
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 July 31, 2018. The principal balance
due on these notes was $1,049,324 and $1,030,080 as of June 30, 2018 and December 31, 2017. Interest accrued was $20,028 and $16,230
for the six months ending June 30, 2018 and December 31, 2017, respectively. The Company issued stock incentives to various directors
and employees. Refer to Note 5 for additional details.