The accompanying
notes are an integral part of these consolidated financial statements.
NOTES TO
FINANCIAL STATEMENTS (UNAUDITED)
AS OF MARCH
31, 2014
NOTE 1 –
ORGANIZATION AND BUSINESS BACK GROUND
OVERVIEW
Verity Corp.
(the “Company”) is a natural-oriented, technologically sophisticated Agribusiness Services company. The Company’s
Corporate Goal is to provide consumers with safe, high-quality and nutritious food sources and high-quality water for drinking
and for agricultural and livestock production. The Company has a portfolio of proprietary natural (
oriented)
products and
services focused from Soil to Plate to fulfill its Corporate Goal.
HISTORY AND PRODUCT OVERVIEW
Verity’s
predecessor company Verity Farms, LLC was incorporated in July 2004. Since then the Company has taken its sustainable crop and
livestock production protocols and developed:
i)
|
a
portfolio of (
hard)
products that can be widely used by either conventional or organic/non-GMO farms to:
|
|
a)
|
improve
the quality of grain, livestock & aquaculture production;
|
|
|
|
|
b)
|
reduce
growing costs; while
|
|
|
|
|
c)
|
maintaining
production yields.
|
ii)
|
a
fully integrated set of Soil and Plant Health Programs that remove substantial barrier for farmers desiring to convert conventional
farms into farms with healthy soil and sustainable, non-GMO crop and livestock production based upon natural practices and
limited chemical applications.
|
These
products and programs position Verity as a leader & one-stop farming & food production resource addressing powerful &
accelerating trends that are altering production methods in the $53 billion Food Market.
ORGANIZATION
& OPERATIONS
The
Company is organized into 3 divisions: Verity Agriculture Productions & Soil Preservation; Verity Water Systems; and Verity
Consumer Products. These distinct divisions are interlinked by one sales team, located in major agricultural production markets,
to provide: farmers, ranchers, food distributors & processors and food manufacturers and grocery retailers a wide spectrum
of product & service solutions to address their issues in production, supply, and market positioning. Verity has integrated
operations at its Corporate Headquarters, in Sioux Falls, South Dakota and in Pelham Georgia, which provides Product Distribution,
Sales, and Crop Advisory Services in Georgia for the Southeast U.S. In order to focus the Company’s limited resources, Verity’s
Consumer products remains in test / pre-production mode. The Company’s Agriculture Production & Soil Preservation Division
and Water Systems Division are moving from a limited “Bottom Up” Sales mode to Mass Commercialization through the
establishment of strategic relationships .
STRATEGY
Verity
changed its top management and corporate organization in Q1 FY2014. This change is accompanied by a change in focus and allocation
of resources that had gained momentum in preceding years.
.
The new CEO has led Verity Sales & Product R&D since
2011. The prior CEO has retired from day-to-day operational responsibilities, is an advisor and consultant to the Company, and
remains a member of Verity’s Board of Directors.
From
FY 2004 through FY 2013, Verity focused on:
|
a)
|
Development
of a distinctive portfolio of unique and innovative products and services.
|
|
|
|
|
b)
|
Development
of a sales & distribution network of Verity representatives that: i) use the Verity Agriculture & Soil Preservation
Products and Services in their family farms; and ii) market and sell Verity Products and Services in the farming communities
in their regions.
|
STRATEGY
(Cont.)
In FY
2014, the Company has: rolled out a distinctive line of Hard Products for use by family farmers
that will also appeal to
Agribusinesses that have integrated production and processing operations. The Company has focused management attention and Company
resources to implementing a new “Top Down” strategy that will complement the Company’s continuing “Bottom
Up” strategy. The “Bottom Up” strategy has created a network of family farmers / salesmen that are Verity’s
eyes, ears, voice and hands in their regions. This Sales Force provides Verity with: a) regional farming and agribusiness intelligence
and has identified prospective Strategic Customer & Distribution opportunities in their regions and b) active family farmers
using, selling and distributing Verity Products & Services in their regions.
The Company’s
new “Top Down” strategy is focusing on:
Part
A)
|
Identifying
strategic customer & relationship prospects and introducing Verity’s easy-to-understand and purchase line of agriculture
production “Hard Products”.
|
|
|
Part
B)
|
Introducing
Verity Corporation and its diverse portfolio of Products and Services to these strategic customers & relationship prospects.
|
Part
A of the Top Down Strategy is expected to result in meaningful increases in FY2014 revenue.. Part B of the Top Down Strategy is
expected to result in customer and business partnership relationships that will strategically expand Verity’s network of
business relationships and sales of the full line of Verity Products and Services. Part B is expected to result in a meaningful
increase in revenue in the intermediate term of FY2014 & FY2015.
COMPETITION
Verity
Corp. operates in environments of heavy competition. However, the Company’s Products & Services have competitive advantages
that can propel their growth with proper resources and effective management. Obtaining a small fraction of market share will provide
Verity with substantial growth opportunities
NOTE 2 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Basis of
Presentation
The accompanying
consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted
in the United States of America (U.S. GAAP) under the accrual basis of accounting.
Use of
Estimates
In preparing
consolidated financial statements in conformity with accounting principles generally accepted in the United States of America,
management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the dates of the consolidated financial statements, as well as the reported amounts of revenues and
expenses during the reporting periods. These accounts and estimates include, but are not limited to, the valuation of accounts
receivables, inventories, prepaid expenses, other receivables, investment in partnership, liabilities and the estimation on useful
lives of property, and plant and equipment. Actual results could differ from these estimates.
Basis of
Consolidation
The consolidated
financial statements include the financial statements of the Company and its subsidiaries.
All significant
inter-company balances and transactions within the Company and subsidiaries have been eliminated upon consolidation.
Cash and
Cash Equivalents
Cash and cash
equivalents are carried at cost and represent cash on hand, demand deposits placed with banks or other financial institutions
and all highly liquid investments with an original maturity of three months or less as of the purchase date of such investments.
Accounts
Receivable
Accounts receivable
are recorded at the invoiced amount and do not bear interest. The Company extends unsecured credit to its customers in the ordinary
course of business but mitigates the associated risks by actively pursuing past due accounts. An allowance for doubtful accounts
is established and determined based on managements’ assessment of the accounts receivables collectibles. Judgment is required
in assessing the amount of the allowance. The Company considers the historical level of credit losses and applies percentages
to different receivables categories. The Company makes judgments about the creditworthiness of each customer based on ongoing
credit evaluations, and monitors current economic trends that might impact the level of credit losses in the future. If the financial
condition of the customers were to deteriorate, resulting in their inability to make payments, a larger allowance may be required.
Accounts
Receivable (cont.)
Based on the
above assessment, during the reporting periods, management establishes the general provisioning policy to make an allowance equivalent
to approximately 5% of the gross amount of accounts receivables. Additional specific provision is made against accounts receivables
to the extent which they are considered to be doubtful.
Historically,
losses from uncollectible accounts have not significantly deviated from the general allowance estimated by management and no significant
additional bad debts have been written off directly to net income. There were no changes in the general provisioning policy in
the past since establishment and management considers that the aforementioned general provisioning policy is adequate, not excessive
and does not expect to change this established policy in the near future. As of December 31, 2013 and September 30, 2013, the
Company recorded an allowance for uncollectible accounts in the amounts of $8,584 and $8,584, respectively.
Inventories
Inventories
consist of raw materials and finished goods and goods available for resale, which are valued at lower of cost or market value,
cost being determined on the first-in, first-out method. The Company periodically reviews historical sales activity to determine
excess, slow moving items and potentially obsolete items and also evaluates the impact of any anticipated changes in future demand.
The Company provides inventory allowances based on excess and obsolete inventories determined principally by customer demand,
which was approximately 5% of ending inventories at the reporting periods. The spoilage will be written-off directly to the profit
and loss when it occurs. As of March 31, 2014 and September 30, 2013, the Company recorded an allowance for obsolete inventories
in the amounts of $36,241 and $33,630, respectively.
Fixed Assets,
Net
Fixed assets
are stated at cost less accumulated depreciation and accumulated impairment losses, if any. Depreciation is calculated on the
straight-line basis over the following expected useful lives from the date on which they become fully operational. There are no
estimated residual values taken into account.
|
|
Depreciable
life
|
|
Residual
value
|
|
Software and website development
|
|
3 years
|
|
|
0
|
%
|
Machinery and Equipment
|
|
5 years
|
|
|
0
|
%
|
Furniture and fixtures
|
|
7 years
|
|
|
0
|
%
|
Expenditures
for maintenance and repairs that do not make the fixed asset more useful or prolong its useful life are expensed as incurred.
Impairment
of Long Lived Assets
The Company
evaluated the recoverability of its property, plant, equipment, and other long-lived assets in accordance with FASB Accounting
Standards Codification Topic 360,
“Property, Plant and Equipment”
(“ASC 360”), which requires recognition
of impairment of long-lived assets in the event the net book value of such assets exceed the estimated future undiscounted cash
flows attributable to such assets or the business to which such intangible assets relate. The Company evaluated the recoverability
of the fixed assets and did not recognize any impairment during the three months ended December 31, 2013.
Fair Value
for Financial Assets and Financial Liabilities
The Company
follows paragraph 825-10-50-10 of the FASB Accounting Standards Codification (“ASC”) for disclosures about fair value
of its financial instruments and paragraph 820-10-35-37 of the FASB ASC (“Paragraph 820-10-35-37”) to measure the
fair value of its financial instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value in U.S. GAAP,
and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and
related disclosures, Paragraph 820-10-35-37 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques
used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted)
in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three levels of fair
value hierarchy defined by Paragraph 820-10-35-37 are described below:
Level
1
|
Quoted
market prices available in active markets for identical assets or liabilities as of the reporting date.
|
|
|
Level
2
|
Pricing
inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable
as of the reporting date.
|
|
|
Level
3
|
Pricing
inputs that are generally observable inputs and not corroborated by market data.
|
The carrying
amounts of the Company’s financial assets and liabilities, such as cash and accounts payable approximate their fair values
because of the short maturity of these instruments.
The Company
does not have any assets or liabilities measured at fair value on a recurring or a non-recurring basis, consequently, the Company
did not have any fair value adjustments for assets and liabilities measured at fair value at December 31, 2013 and September 30,
2013 nor gains or losses are reported in the statement of operations that are attributable to the change in unrealized gains or
losses relating to those assets and liabilities still held at the reporting date for the for the three months ended December 31,
2013.
Revenue
Recognition
The Company
derives revenues from the sale of agricultural products, animal feeds, consulting services, and various water units. In accordance
with guidance by paragraph 605-10-S99-1 of the FASB ASC for revenue recognition, the Company recognizes revenue when persuasive
evidence of an arrangement exists, transfer of title has occurred or services have been rendered, the selling price is fixed or
determinable and collectability is reasonably assured. The Company’s sales arrangements are not subject to warranty.
Cost of
Goods Sold
Cost of goods
sold consists primarily of material costs which are directly attributable to the manufacture of products, to the products held
for resale and to the provision of services.
Income
Taxes
The Company
adopts the ASC Topic 740, “Income Taxes ” regarding accounting for uncertainty in income taxes which prescribes the
recognition threshold and measurement attributes for financial statement recognition and measurement of tax positions taken or
expected to be taken on a tax return. In addition, the guidance requires the determination of whether the benefits of tax positions
will be more likely than not sustained upon audit based upon the technical merits of the tax position. For tax positions that
are determined to be more likely than not sustained upon audit, a company recognizes the largest amount of benefit that is greater
than 50% likely of being realized upon ultimate settlement in the financial statements. For tax positions that are not determined
to be more likely than not sustained upon audit, a company does not recognize any portion of the benefit in the financial statements.
The guidance provides for de-recognition, classification, penalties and interest, accounting in interim periods and disclosure.
For the three months ended December 31, 2013 and 2012, the Company did not have any interest and penalties associated with tax
positions. As of December 31, 2013 and September 30, 2013, the Company did not have any significant unrecognized uncertain tax
positions.
Deferred tax
assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement
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 be applied to taxable income in the years in which those temporary differences are expected
to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statement of income
in the period that includes the enactment date. A valuation allowance is provided for deferred tax assets if it is more likely
than not these items will either expire before the Company is able to realize their benefits, or that future deductibility is
uncertain.
Uncertain
Tax Positions
The Company
did not take any uncertain tax positions and had no adjustments to unrecognized income tax liabilities or benefits pursuant to
the provisions of Section 740-10-25 for the three months ended December 31, 2013.
Comprehensive
income
The Company
adopted FASB Accounting Standards Codification 220 “Comprehensive Income” (ASC “220”) which establishes
standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income as
defined includes all changes in equity during the year from non-owner sources. There are no items of comprehensive income (loss)
applicable to the Company during the years covered in the consolidated financial statements.
Off-balance
sheet arrangements
The Company
does not have any off-balance sheet arrangements.
Related
Parties
The Company
follows subtopic 850-10 of the FASB Accounting Standards Codification for the identification of related parties and disclosure
of related party transactions.
Pursuant to
Section 850-10-20 the 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 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 income statements 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 income statements 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.
Commitments
and Contingencies
The Company
follows subtopic 450-20 of the FASB Accounting Standards Codification to report accounting for contingencies. Certain conditions
may exist as of the date the consolidated financial statements are issued, which may result in a loss to the Company but which
will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities,
and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings
that are pending against the Company or unasserted claims that may result in such proceedings, the Company evaluates the perceived
merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected
to be sought therein.
If the assessment
of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated,
then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a
potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then
the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be
disclosed.
Loss contingencies
considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed.
Management does not believe, based upon information available at this time that these matters will have a material adverse effect
on the Company’s consolidated financial position, consolidated results of operations or consolidated cash flows. However,
there is no assurance that such matters will not materially and adversely affect the Company’s business, consolidated financial
position, and consolidated results of operations or consolidated cash flows.
Subsequent
Events
The Company
adopted FASB Accounting Standards Codification 855 “Subsequent Events” (“ASC 855”) to establish general
standards of accounting for and disclosure of events that occur after the balance sheet date, but before the financial statements
are issued or available to be issued.
Recently
issued accounting standards
The Company
has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of
any such pronouncements may be expected to cause a material impact on its consolidated financial condition or the consolidated
results of its operations.
In May 2011,
FASB issued Accounting Standards Update No. 2011-04, “Fair Value Measurements (ASC 820): Amendments to Achieve Common
Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“ASU 2011-04”). ASU 2011-04
changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information
about fair value measurements to ensure consistency between U.S. GAAP and IFRS. ASU 2011-04 also expands the disclosures
for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This new guidance is
to be applied prospectively. The Company anticipates that the adoption of this standard will not materially expand its financial
statement note disclosures.
In June 2011,
FASB issued ASU No. 2011-05, “Comprehensive Income (ASC 220): Presentation of Comprehensive Income” (“ASU
2011-05”), which amends current comprehensive income guidance. This accounting update eliminates the option to present the
components of other comprehensive income as part of the statement of shareholders’ equity. Instead, the Company must report
comprehensive income in either a single continuous statement of comprehensive income which contains two sections, net income and
other comprehensive income, or in two separate but consecutive statements. ASU 2011-05 will be effective for public companies
during the interim and annual periods beginning after December 15, 2011, with early adoption permitted. The Company is reviewing
ASU 2011-05 to ascertain its impact on the Company’s consolidated financial position, results of operations or cash flows
as it only requires a change in the format of the current presentation.
In September
2011, the FASB issued ASU 2011-08, “Testing Goodwill for Impairment”, which allows, but does not require, an entity
when performing its annual goodwill impairment test the option to first do an initial assessment of qualitative factors to determine
whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount for purposes of determining
whether it is even necessary to perform the first step of the two-step goodwill impairment test. Accordingly, based on the option
created in ASU 2011-08, the calculation of a reporting unit’s fair value is not required unless, as a result of the qualitative
assessment, it is more likely than not that fair value of the reporting unit is less than its carrying amount. If it is less,
the quantitative impairment test is then required. ASU 2011-08 also provides for new qualitative indicators to replace those currently
used. Prior to ASU 2011-08, entities were required to test goodwill for impairment on at least an annual basis, by first comparing
the fair value of a reporting unit with its carrying amount. If the fair value of a reporting unit is less than its carrying amount,
then the second step of the test is performed to measure the amount of impairment loss, if any. ASU 2011-08 is effective for annual
and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted.
The Company adopted ASU 2011-08 during the first quarter of fiscal 2013. The adoption of ASU 2011-08 did not impact the Company’s
results of operations or financial condition.
In December
2011, FASB issued Accounting Standards Update 2011-11, “Balance Sheet - Disclosures about Offsetting Assets and Liabilities”
to enhance disclosure requirements relating to the offsetting of assets and liabilities on an entity’s balance sheet. The
update requires enhanced disclosures regarding assets and liabilities that are presented net or gross in the statement of financial
position when the right of offset exists, or that are subject to an enforceable master netting arrangement. The new disclosure
requirements relating to this update are retrospective and effective for annual and interim periods beginning on or after January
1, 2013. The update only requires additional disclosures, as such, the Company does not expect that the adoption of this standard
will have a material impact on its consolidated results of operations, cash flows or financial condition.
In July 2012,
the FASB issued ASU No. 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment”. The guidance allows
companies to perform a “qualitative” assessment to determine whether further impairment testing of indefinite-lived
intangible assets is necessary, similar in approach to the goodwill impairment test.
ASU 2012-02
allows companies the option to first assess qualitatively whether it is more likely than not that an indefinite-lived intangible
asset is impaired, before determining whether it is necessary to perform the quantitative impairment test. An entity is not required
to calculate the fair value of an indefinite-lived intangible asset and perform the quantitative impairment test unless the entity
determines that it is more likely than not that the asset is impaired. Companies can choose to perform the qualitative assessment
on none, some, or all of its indefinite-lived intangible assets or choose to only perform the quantitative impairment test for
any indefinite-lived intangible in any period.
ASU 2012-02
is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with
early adoption permitted. The Company is in the process of evaluating the guidance and the impact ASU 2012-02 will have on its
consolidated financial statements.
The accompanying
financial statements have been prepared by the Company in accordance with Article 8 of U.S. Securities and Exchange Commission’s
(the “SEC”) Regulation S-X. In the opinion of management, all adjustments (which include only normal recurring adjustments)
necessary to present fairly the financial position, results of operations, and cash flows at September 30, 2013 and 2012 and for
the periods then ended have been made. Certain information and footnote disclosures normally included in financial statements
prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted. It is suggested that
these condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s
December 31, 2013 financial statements.
NOTE 3 – GOING CONCERN
The Company’s
financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business. At March 31, 2014, the Company had a retained deficit of
$11,505,927 and current liabilities in excess of current assets by $4,973,725. During the six months ended March 31, 2014, the
Company incurred a net loss of $674,016 and incurred negative cash flows from operations of $429,594. These factors create an
uncertainty about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments
that might be necessary if the Company is unable to continue as a going concern.
The Company’s
continuation as a going concern is dependent upon its ability to increase revenues, decrease or contain costs and achieve profitable
operations. In this regard, Company’s management is focused on the development and expansion of the Company’s technology,
including water filtration and purification, bio-information and life sciences, the deployment of its technology platform in the
agricultural medical fields, and the licensing of patents, as well as exploring strategic acquisitions in the technology field.
Should the Company’s financial resources prove inadequate to meet the Company’s needs before additional revenue sources
can be realized, the Company may raise additional funds through loans or through sales of common or preferred stock. There is
no assurance that the Company will be successful in achieving profitable operations or in raising any additional capital.
NOTE 4 – RELATED PARTY
TRANSACTIONS
Note
payable- related party: At March 31, 2014, the Company had a note payable due to our Board Member in the amount of $341,267 which
is secured by the Company’s ownership in Aistiva Corporation, carries accrued interest of 6% and is due on December 28,
2013, the interest accrued but not paid as of March 31, 2014 is $24,998. A second note payable to our Board Member in the amount
of $3,220,000 is unsecured, carries an interest rate of 3% and is due on demand. The interest accrued, but not paid as of March
31, 2014 is $133,446. A third note payable to our Board Member in the amount of $150,000, is unsecured, carries an interest rate
of 5% and is due on demand. The interest accrued but not paid as of March 31, 2014 is $18,154. A fourth note payable to our Board
Member in the amount of $340,000, is unsecured, carries an interest rate of 3% and is due on demand. The interest accrued but
not paid as of March 31, 2014 is $26,086.
Real
estate loan- related party: In December 2012, the Company issued a note payable in the amount of $2,400,000 to a company under
the control of our Board Member to acquire land. The loan is secured by real estate, carries an interest rate of 6% and is due
in September 2018. At March 31, 2014, the balance of this loan is $2,400,000 and the interest accrued but not paid is $180,000.
In December 2012, the Company issued a note payable in the amount of $500,000 to a company under the control of our Board Member
to acquire a building. The loan is secured by real estate, carries an interest rate of 6% and is due in September 2017. At March
31, 2014, the balance of this loan is $500,000 and the interest accrued but not paid is $37,500.
NOTE 5 – VERITY FARMS ACQUISITION
|
|
December
31, 2012
|
|
|
|
|
|
Acquisition value
|
|
|
|
|
|
|
|
|
|
Capital in excess of par
|
|
$
|
4,845,150
|
|
Preferred shares –
4,850,000 Series B
|
|
|
4,850
|
|
Assumed liabilities
|
|
|
5,665,579
|
|
Total Acquisition value
|
|
$
|
10,515,579
|
|
|
|
|
|
|
Valuation classification
|
|
|
|
|
Cash
|
|
$
|
227,474
|
|
Accounts receivable
|
|
|
62,775
|
|
Inventory
|
|
|
495,323
|
|
Notes receivable
|
|
|
96,756
|
|
Land
|
|
|
2,400,000
|
|
Warehouses
|
|
|
800,000
|
|
Equipment
|
|
|
298,423
|
|
Other assets
|
|
|
191,296
|
|
|
|
|
|
|
Goodwill
|
|
|
5,943,533
|
|
Impairment of Goodwill
|
|
|
(5,943,533
|
)
|
Goodwill, net
|
|
|
—
|
|
|
|
|
|
|
Net value
|
|
$
|
4,572,046
|
|
The Company recorded the acquisition
at its fair market value in that the cash, accounts receivable, inventory, notes receivable, land, warehouses, equipment and other
miscellaneous assets were recorded at their fair market value on the date of the acquisition. Impairment of goodwill from the
date of acquisition was written off to its net realizable value in the accompanying statements of operations.
NOTE
–
6
ACCOUNTS RECEIVABLE
Accounts receivable
was comprised of the following amounts as of March 31, 2014 and March 31, 2013:
|
|
03/31/2014
|
|
|
09/30/2013
|
|
|
|
|
|
|
|
|
Gross accounts
receivable from customers
|
|
$
|
261,015
|
|
|
$
|
158,327
|
|
Allowance for doubtful
customer accounts
|
|
|
(8,584
|
)
|
|
|
(8,584
|
)
|
Accounts receivable,
net
|
|
$
|
252,431
|
|
|
$
|
149,743
|
|
The bad debt
expenses of $0 and $0 were recognized during the six months ended March 31, 2014 and 2013, respectively, in the accompanying consolidated
statements of operations.
NOTE
– 7 INVENTORIES
Inventories
as of March 31, 2014 and September 30, 2013 consisted of the following:
|
|
03/31/2014
|
|
|
9/30/2013
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
57,143
|
|
|
$
|
75,357
|
|
Work in Process
|
|
|
56,541
|
|
|
|
|
|
Finished goods
|
|
|
597,542
|
|
|
|
534,539
|
|
|
|
|
711,226
|
|
|
|
609,896
|
|
Allowance for obsolete
inventories
|
|
|
(36,240
|
)
|
|
|
(33,630
|
)
|
Inventories, net
|
|
$
|
674,986
|
|
|
$
|
576,266
|
|
The Company provides inventory
allowances based on excess and obsolete inventories determined principally by customer demand. Accordingly, the Company recorded
cost of goods sold due to inventories obsolescence in amount of $2,610 and $0 during the six months ended March 31, 2014 and 2013,
respectively.
NOTE
– 8
PREPAID EXPENSES
As of March
31, 2014 and September 30, 2013, the Company had prepaid expenses of $135,844 and $136,391, respectively, and consisted of the
following:
|
|
03/31/2014
|
|
|
9/30/2013
|
|
|
|
|
|
|
|
|
Prepaid insurance
|
|
$
|
42,723
|
|
|
$
|
44,017
|
|
Prepaid inventories
|
|
|
93,121
|
|
|
|
92,374
|
|
Total
|
|
$
|
135,844
|
|
|
$
|
136,391
|
|
NOTE – 9 FIXED ASSETS
|
|
03/31/2014
|
|
|
9/30/2013
|
|
Machinery and
equipment
|
|
$
|
585,253
|
|
|
|
513,298
|
|
Software and website development
|
|
|
68,184
|
|
|
|
68,184
|
|
Furniture and fixtures
|
|
|
26,491
|
|
|
|
26,491
|
|
Land
|
|
|
2,400,000
|
|
|
|
2,400,000
|
|
Warehouses
|
|
|
800,000
|
|
|
|
800,000
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment
|
|
|
3,879,928
|
|
|
|
3,807,973
|
|
Less accumulated
depreciation
|
|
|
(426,967
|
)
|
|
|
(353,980
|
)
|
|
|
|
|
|
|
|
|
|
Net property and
equipment
|
|
$
|
3,452,961
|
|
|
|
3,453,993
|
|
Depreciation
expense for the six months ended March 31, 2014 and 2013 was $72,987 and $39,223, respectively.
Land valued
at $2,400,000 as of March 31, 2014, includes a 240 acre parcel located in Sioux Falls, South Dakota. The Company acquired the
land for the purposes of a future corporate campus and to create buffered test plots for our various farming operations. The property
was originally acquired from a board member at an appraised value of $9,963 per acre.
Warehouses
include two properties whose total value is $800,000 as of March 31, 2014. The first property is located in Pelham, Georgia, includes
16 acres, a 16,748 square foot building and is being used as a distribution center. The property was acquired from our board member
for $500,000. Prior to the acquisition, the property was appraised for $469,000 and received improvements totaling $110,000 since
its original purchase. The second warehouse, also being used as a distribution center, is located in Orange City, Iowa. The property
was acquired from a third party for $300,000 and has a 6,600 square foot building on 20 acres of land.
NOTE
– 10
INVESTMENT IN PARTNERSHIP
In 2006, Verity
Farms II acquired a 19% interest in Crop Resources LLC by contributing $25,000 cash to the partnership. Investment in partnership
was comprised of the following amounts as of March 31, 2014.
|
|
|
Crop
Resources LLC
|
|
Partnership
|
|
|
|
|
Percentage
of Ownership
|
|
|
19
|
%
|
Book Equity 03/31/2014
|
|
$
|
19,798
|
|
Share of Net Income/(Loss)
|
|
|
167
|
|
|
|
|
|
|
Book Equity 03/31/2014
|
|
|
19,965
|
|
NOTE 11 – NOTES PAYABLE
Note
payable: At March 31, 2014, the Company had a note payable to an affiliated company of one of our former officers in the amount
of $28,955, which is not secured by collateral of the Company, carries accrued interest of 6% and is due on demand by the holder.
In July 2013, the Company entered into a Mutual Rescission of Note Conversion and Reinstatement of Debt Agreement, Pursuant to
which an aggregate of 900,000 shares of common stock were returned to the Company and $72,000 worth of note payable was reinstated.
Note
payable- related party: At March 31, 2014, the Company had a note payable due to our Board Member in the amount of $341,267 which
is secured by the Company’s ownership in Aistiva Corporation, carries accrued interest of 6% and is due on December 28,
2013, the interest accrued but not paid as of March 31, 2014 is $24,998. A second note payable to our Board Member in the amount
of $3,220,000 is unsecured, carries an interest rate of 3% and is due on demand. The interest accrued, but not paid as of March
31, 2014 is $133,446. A third note payable to our Board Member in the amount of $150,000, is unsecured, carries an interest rate
of 5% and is due on demand. The interest accrued but not paid as of March 31, 2014 is $18,154. A fourth note payable to our Board
Member in the amount of $340,000, is unsecured, carries an interest rate of 3% and is due on demand. The interest accrued but
not paid as of March 31, 2014 is $26,086.
Real estate
loan: In December 2012, the Company issued a note payable in the amount of $278,500 to acquire a building from an unrelated party.
The loan is secured by real estate, carries an interest rate of 4.7% and is due in January 2015. At March 31, 2014, the balance
of this loan is $267,351 and the Company has paid $5,684 in interest during the six months ended March 31, 2014.
Real
estate loan- related party: In December 2012, the Company issued a note payable in the amount of $2,400,000 to a company under
the control of our Board Member to acquire land. The loan is secured by real estate, carries an interest rate of 6% and is due
in September 2018. At March 31, 2014, the balance of this loan is $2,400,000 and the interest accrued but not paid is $180,000.
In December 2012, the Company issued a note payable in the amount of $500,000 to a company under the control of our Board Member
to acquire a building. The loan is secured by real estate, carries an interest rate of 6% and is due in September 2017. At March
31, 2014, the balance of this loan is $500,000 and the interest accrued but not paid is $37,500.
Principal
maturities of these loans payable for the next five years and thereafter are as follows:
|
|
|
Principal
|
|
Years
ended September 30,
|
|
|
|
|
2014
|
|
|
981,033
|
|
2015
|
|
|
369,060
|
|
2016
|
|
|
391,204
|
|
2017
|
|
|
510,611
|
|
2018
|
|
|
911,455
|
|
Thereafter
|
|
|
0
|
|
|
|
|
3,163,363
|
|
NOTE
– 12
CUSTOMER DEPOSITS
As of March 31, 2014 and September
30, 2013, the Company had customer deposits of $25,299 and $10,241, respectively, representing payments received for orders not
yet shipped.
NOTE 13 – SHAREHOLDERS’
EQUITY
On
April 4, 2013, the Company effectuated a 1 for 100 reverse split of its common stock. All common stock and per share data for
all periods presented in these financial statements have been restated to give effect to the reverse split.
On October 9, 2012, the Company
issued 214,839 (post-reverse split) shares of common stock to Asher Enterprises, Inc to retire $31,306 in debt and accrued interest.
On November 11, 2012, the Company
issued 225,492 (post-reverse split) shares of common stock to Auctus Private Equity Management, Inc. (“Auctus”) as
commitment shares valued at $22,994 pursuant to the Equity Agreement.
On December 10, 2012, the Company
issued 1,200,000 (post-reverse split) shares of common stock to four shareholders to retire a total of $95,182 in debt and accrued
interest.
On December 31, 2012, the Company
issued 250,000 (post-reverse split) shares of common stock to Trak Management Group, Inc. as compensation for consultation services
valued at $25,000.
On December 31, 2012, the Company
issued 150,000 (post-reverse split) shares of common stock as compensation for rendered professional services valued at $15,000.
On December 31, 2012, the Company
issued 50,000 (post-reverse split) shares of common stock to Auctus as commitment shares valued at $4,000 pursuant to the Equity
Agreement.
On December 31, 2012, the Company
issued 4,850,000 shares of Series B Convertible Preferred Stock to its shareholders of Verity Farms II, Inc. valued at $4,850,000
pursuant to a share exchange agreement.
On February 26, 2013, the Company
reduced the number of Series C preferred Stock from 10,000 shares to 51 shares.
On April 12, 2013, the Company
issued 69,672 shares of common stock to Dayspring Capital as compensation for their consulting services valued at $29,958.
On April 12, 2013, the Company
issued 278,686 shares of common stock to Maxim Partners LLC as compensation for their consulting services valued at $119,834.98.
On July 23, 2013, the Company
entered into a Mutual Rescission of Note Conversion and Reinstatement of Debt Agreement, Pursuant to which an aggregate of 900,000
shares of common stock were returned to the Company and $72,000 worth of note payable was reinstated.
On August 22, 2013, 9 shareholders
converted an aggregate of 582,000 shares of Series A preferred stock to 1,986,340 shares of common stock.
The company didn’t issue
any stock for the three months ended March 31, 2014.
Note
– 14 Subsequent Event
Termination
of Contracts for Deed
In
December 2012, our wholly owned subsidiary Verity Farms LLC (“Verity Farms”), entered into a Contract for Deed, as
amended, with Spader, Inc. (“Spader”, a company controlled by Duane Spader, then an officer, Director and principal
stockholder of the Verity Corp. (the “Company”). Pursuant to the Agreement, Verity Farms purchased certain real estate
interests in South Dakota from Spader, in exchange for $2,400,000 to be paid over time. The Company has not made any payment to
Spader under the agreement. On May 16, 2014, Verity Farms and Spader entered into a Termination Agreement, pursuant to which the
property rights were returned to Spader and the financial obligations were terminated, resulting in the elimination of $2,400,000
owed to Spader, together with accrued interest of $192,000 as of April 30, 2014.
In
December 2012, Verity Farms entered into a Contract for Deed, as amended, with Spader pursuant to which Verity Farms purchased
certain real estate interests in Georgia from Spader, in exchange for $500,000 to be paid over time. The Company has not made
any payment to Spader under the agreement. On May 16, 2014, Verity Farms and Spader entered into a Termination Agreement, pursuant
to which the property rights were returned to Spader and the financial obligations were terminated, resulting in the elimination
of $500,000 owed to Spader, together with accrued interest of $40,000 as of April 30, 2014.
Amendment
to Loan Arrangements
The
Company and its subsidiaries previously borrowed various amounts from Duane Spader. On May 16, the Company and its subsidiaries
entered into agreements with Mr. Spader pursuant to which the maturity date of the loans was extended and interest payment dates
were modified. Accrued Interest from December 31, 2012 to September 30, 2015 will be due and payable on or before September 30,
2015. After September 30, 2015, interest accrued will be due on or before September 30, 2016, 2017, 2018 and 2019. The principal
amount of $3,220,000 will be due to lender in three annual payments as follows:
$1,073,333.34
plus any unpaid accrued interest …. Due September 30, 2017
$1,073,333.33
plus any unpaid accrued interest …. Due September 30, 2018
$1,073,333.33
plus any unpaid accrued interest …. Due September 30, 2019
In
connection with the foregoing, the Company and its subsidiaries also granted security interests to Mr. Spader in substantially
all of the Company’s and subsidiaries assets.