NOTES
TO FINANCIAL STATEMENTS (UNAUDITED)
AS
OF MARCH 31, 2013
NOTE
– 1
ORGANIZATION AND BUSINESS BACKGROUND
Verity
Corp. (the “Company”) is the parent of Verity Farms II, Inc. (“Verity Farms II”) and Aistiva Corporation
(“Aistiva”) (fka AquaLiv, Inc.). Verity Farms II is dedicated to providing consumers with safe, high-quality and nutritious
food sources through sustainable crop and livestock production. Aistiva’s technology alters the behavior of organisms, affecting
plants and animals, without chemical interaction. From increased crop yields to drug-free medicine, Aistiva is providing innovative,
ingredient-free solutions to the world’s largest problems. The Company’s platform technology influences biological
processes naturally and without chemical interaction. To date, Aistiva has released products in the industries of water treatment,
skincare, and agriculture.
Verity
Farms II, Inc.
On
December 31, 2012, the Company entered into that certain share exchange agreement (the “Share Exchange Agreement”)
by and among the Company, Verity Farms II, Aistiva, and Focus Systems, pursuant to which the Company acquired 100% of the outstanding
stock of Verity Farms II. Verity Farms II is dedicated to providing consumers with safe, high quality and nutritious food sources
through sustainable crop and livestock production. Verity Farms II has built the foundation for expansion that is diversified
into three distinct, yet interlinked, divisions operating six business units. The three divisions: Soil Preservation, Verity Water
Systems and Consumer Products. Soil Preservation consists of Verity Farms and Verity Turf; Verity Water Systems comprises its
own division; and, Consumer Products will consist of Verity Meats, Verity Produce and Verity Grains. The common goal within each
business unit of Verity Farms II is to decrease chemical dependency, diminish the need for genetic modification, preserve the
family farm, and ultimately, provide a nutritious, high-quality food source to consumers. Revenues generated from Verity Farms
II’s products for the three months ended March 31, 2013 were $460,673.
Verity
Farms
Since
the 1970’s, farmers associated with Verity Farms II and its subsidiaries and predecessors have dedicated their farming practices
to healthy soil and crop production based upon natural practices and limited chemical usage. Since June 2011, substantial resources
of people and facilities have been applied to build the organizational model to expand those efforts into an effective and efficient
growth of natural healthy food products.
Verity
Turf
Verity
Farms II has developed an environmentally friendly Organic Materials Review Institute (“ORMI”) approved fertilizer
to provide a natural, weed-free lawn that is safe to use and good for the environment. This product is people and pet friendly.
It nurtures your grass by enhancing the natural biology of your soil.
Verity
Water Systems
Verity
Water Systems units are maintenance-free products designed to be used directly in water lines to both revitalize the water at
the molecular level and to increase the water’s energy-carrying capability. Different models are designed according to the
water capacity needed either for personal or commercial usage. Some of the potential benefits of Verity Water Systems as represented
by the Company include: healthier livestock and poultry through improved hydration, oxygenation and energy; plants require less
water; increase in nutrient content of seed crops and produce; plants withstand extremes in hot and freezing temperatures better;
significantly increased bio-availability of nutrients; longer shelf life of agricultural produce and cut flowers; decreased seed
germination time; greatly improved aerobic bacterial activity; eliminates mineral deposits like calcium, iron & aragonite;
reduced bio-availability of pollutants and toxins; and increased life span of water valves, pipes, hot water heaters, swamp-coolers
and humidifiers.
Verity
Meats
Verity
Meats has on a limited basis and intends to expand the offer of all -natural meat products born and raised with pride by American
Family Farmers. Working with only a core group of dedicated livestock producers throughout South Dakota, Minnesota and Iowa, The
Company was able to tailor production protocols directly to end-product needs. By knowing the importance of using quality inputs
for quality results, its producers follow a program that utilizes the best of animal nutrition, health, technology, and economics
along with many years of practical knowledge and scientific principles. Verity Family Farmers follow defined protocols for the
production of their grain and livestock. The protocols require proper preparation of the ground. Following up to three years of
conditioning and cleansing of the soil, the soil is tested and must be free of more than 250 chemical residues. The grain used
to feed the livestock must pass the same test before qualifying as feed for Verity livestock. The result is the highest quality
meats available, according to management, – raised for Verity Farms customer’s total eating enjoyment and health.
Verity
Grains
Verity
Grain comes from the harvest of Verity Farms Crops. These grains originate from only non-GMO (genetically modified organism) seeds
which are raised on soil which has tested below detectable limits for 250 known carcinogens and chemicals residues (test performed
by independent labs using FDA and EPA test methods/guidelines). Following harvest, these grains are again tested for the 250 known
carcinogens and chemical residues. Those grains which test free from those carcinogens and chemicals are then Verity Farms II
certified to be fed to livestock and sold for consumption.
Verity
Produce
Verity
Produce is the newest, and could become one of the most crucial components of the Company. Verity Produce consists of fruits and
vegetables which are raised for human consumption. Verity Produce has been patterned after the Verity Farms crop production program,
utilizing the same concept of creating a healthy, balanced soil. This creates an optimum environment for plants to grow and flourish.
Aistiva
Corporation
Aistiva’s
scientists discovered that most substances and compounds have a unique information signature that influences biological
processes via a magnetic cellular mechanism (non-chemical). The company’s technology records this biologically
significant magnetic information (bio-information) from a compound or substance and allows for the manipulation, combining,
and subsequent transmittal to an organism. Bio-information from a variety of sources are combined and/or altered to produce a
bio-information composite designed to influence specific biological processes. The composite can be transmitted to an
organism via a variety of methods, including mineralized water, electromagnetic wave, or magnetic field. This technology has
the potential to greatly enhance the Verity chemical free plant and animal productions.
The
technology, while still at an early stage of development, already has direct applications in the industries of water purification,
environmental science, agriculture, animal husbandry, personal use products, and medicine. Revenues generated from Aistiva’s
products for the three months ended March 31, 2013 were $125,992.
AquaLiv
Water System
The
AquaLiv Water System is a water purification and enhancement apparatus that produces a high-quality drinking water. A
variety of technologies are utilized in the system to remove impurities from the water, add minerals to the water, alter the
molecule to molecule bonding structure of the water molecules, reduce the surface tension, improve the Oxidation Reduction
Potential, and increase the pH, dissolved oxygen, and dissolved hydrogen content in the water. Additionally, the
water’s bio-information is altered to resemble spring water before processing and treatment. Users of the AquaLiv Water
System have reported stabilized blood sugar, improvements in both high and low blood pressure, reduced allergy symptoms, less
headaches, better digestion, and healthy glowing skin. Some diabetics have even reported that AquaLiv Water System helped
them decrease their insulin requirements. AquaLiv Water System testimonials are validated by a 3rd party. The AquaLiv Water
System has approximately 400 users and produces approximately 99% of Aistiva’s sales revenues. The Aistiva water
systems provide a key link to Human water consumption that is missing in the Verity water systems.
Infotone
Hydrating Mist
Infotone
Hydrating Mist is a skincare product designed to clear blemishes, fade wrinkles, and even skin tone. Each mister contains a ceramic
bead infused with Aistiva’s bio-information technology. The technology allows simple spring water to activate skin’s natural healing
ability resulting in clear, youthful, and glowing skin. Infotone Hydrating Mist is refillable for a full year making it an economical
and sustainable skincare product. The mist is 100% natural and hypoallergenic and contains no parabens, additives, chemicals,
GMOs, fragrances or artificial ingredients. The benefits of using the product are primarily derived through the elimination of
a common skin parasite responsible for irritation (found on 50% of all adults), decreasing the production of melanin in cells
that are overproducing and increasing skin hydration. The Infotone Hydrating Mist has approximately 850 users and produces approximately
1% of Aistiva’s sales revenues.
AgSmart
Rice
AgSmart
Rice is combined service and product offering that increases rice yields by 30-60% on average (data from actual commercial
usage) while decreasing the duration before harvest by approximately one month. Treated rice crops are more resistant to
pests, diseases, and wind/hail damage. AgSmart Rice is 100% natural and organic standards compliant and uses no chemical
fertilizers, herbicides, or pesticides. AgSmart Rice benefits rice plants by encouraging greater root growth and
photosynthesis ability. AgSMart Rice has been available since 2011 and is currently used by 2 farms at no charge for their
aid in AgSmart Rice’s development. AgSmart Rice is not marketed due to a lack of financial resources and personnel. As
of today, AgSmart Rice does not produce any revenue.
AgSmart
Potato
AgSmart
Potato is a combined service and product offering that has shown increases in potato yields by over 100% in market value (calculated
using recent size/weight values coupled with average test results between treated and untreated test plots) under initial company
testing. Treated potato crops have a consistent number of potatoes compared to untreated crops, however, the average size and
weight are significantly increased while the normal counts of waste-sized potatoes are greatly reduced. Treated crops have also
shown to be more resistant to pests and diseases caused by bacteria and viruses. AgSmart Potato is 100% natural and organic standards
compliant and uses no chemical fertilizers, herbicides, or pesticides. AgSmart Potato benefits potato plants by encouraging greater
root growth and photosynthesis ability while controlling bacterial and fungal activity. The Company plans on performing further
third party commercial tests of the product prior to commercial distribution. The product is still under development and not yet
available to the general public.
NatuRx
Medication Alternatives
Based
on Aistiva’s bio-information technology, NatuRx formulations utilize bio-information composites in lieu of active-molecules
(drugs) for treatment. The formulations are non-toxic and have no contraindications. NatuRx formulations are in development and
not yet available to the general public.
Verity
Farms II and Aistiva Resources combined
The
practical and historical proven practices of Verity’s crop and animal production processes, combined with the advanced “scientific
potential” of Aistiva’s products will provide Verity Corp the synergy to set the standards in healthy food production.
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 performing credit checks and 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.
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 March 31, 2013 and September 30, 2012, the Company
recorded an allowance for uncollectible accounts in the amounts of $12,577 and $0, 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, 2013 and September 30, 2012, the
Company recorded an allowance for obsolete inventories in the amounts of $29,711 and $27,163, 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 period ended March 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 March 31, 2013 and September
30, 2012 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 six months ended March 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 six months ended March 31, 2013 and 2012, the Company did not have any interest and penalties associated with tax positions.
As of March 31, 2013 and September 30, 2012, 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 six months ended March 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 December 31,
2012 and 2011 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 September 30, 2012 audited financial statements. The results of operations for the periods ended
March 31, 2013 and 2012 are not necessarily indicative of the operating results for the full year.
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, 2013, the Company
had a retained deficit of $9,836,723 and current liabilities in excess of current assets by $2,851,215. During the three
months ended March 31, 2013, the Company incurred a net loss of $529,624 and during the six months ended March 31, 2013, the
Company incurred negative cash flows from operations of $1,136,783. 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
Shareholder
Loans - During the three months ended March 31, 2013, the Company’s officers, either personally or through companies in
their control, extended an additional use of credit in the amounts of $0, $50,000, and $424,600 for total outstanding loans of
$28,955, $291,267, $2,610,000, respectively. The credit carries various interest rates ranging from 3.0% to 6.0%. Additionally,
there are two real estate notes payable to companies under the control of an officer of the Company in the amounts of $2,400,000
and $500,000. The real estate credit carries an interest rate of 6%.
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
|
|
|
5,635,823
|
|
Total Acquisition value
|
|
$
|
10,485,823
|
|
|
|
|
|
|
Valuation classification
|
|
|
|
|
Cash
|
|
$
|
227,474
|
|
Accounts receivable
|
|
|
94,290
|
|
Inventory
|
|
|
548,997
|
|
Notes receivable
|
|
|
96,756
|
|
Land
|
|
|
2,400,000
|
|
Warehouses
|
|
|
800,000
|
|
Equipment
|
|
|
336,089
|
|
Other assets
|
|
|
191,296
|
|
|
|
|
|
|
Goodwill
|
|
|
5,790,922
|
|
Impairment of Goodwill
|
|
|
(5,790,922
|
)
|
Goodwill, net
|
|
|
—
|
|
|
|
|
|
|
Net value
|
|
$
|
4,694,901
|
|
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, 2013 and September 30, 2012:
|
|
3/31/2013
|
|
|
9/30/2012
|
|
|
|
|
|
|
|
|
Gross accounts receivable from customers
|
|
$
|
297,385
|
|
|
$
|
1,856
|
|
Allowance for doubtful customer accounts
|
|
|
(12,577
|
)
|
|
|
(0
|
)
|
Accounts receivable, net
|
|
$
|
284,808
|
|
|
$
|
1,856
|
|
The
bad debt expenses of $(18,938) and $0 were recognized during the six months ended March 31, 2013 and 2012, respectively, in the
accompanying consolidated statements of operations.
NOTE
7 – INVENTORIES
Inventories
as of March 31, 2013 and September 30, 2012 consisted of the following:
|
|
3/31/2013
|
|
|
9/30/2012
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
93,826
|
|
|
$
|
0
|
|
Finished goods
|
|
|
506,445
|
|
|
|
1,156
|
|
|
|
|
600,271
|
|
|
|
1,156
|
|
Allowance for obsolete inventories
|
|
|
(29,711
|
)
|
|
|
(0
|
)
|
Inventories, net
|
|
$
|
570,560
|
|
|
$
|
1,156
|
|
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 $2,548 and $0 during the six months ended
March 31, 2013 and 2012, respectively.
NOTE
8 –
PREPAID EXPENSES
As
of March 31, 2013 and September 30, 2012, the Company had prepaid expenses of $241,415 and $0, respectively, and consisted of
the following:
|
|
3/31/2013
|
|
|
9/30/2012
|
|
|
|
|
|
|
|
|
Prepaid insurance
|
|
$
|
35,292
|
|
|
$
|
0
|
|
Prepaid inventories
|
|
|
206,123
|
|
|
|
0
|
|
Total
|
|
$
|
241,415
|
|
|
$
|
0
|
|
NOTE
9 – FIXED ASSETS
|
|
03/31/2013
|
|
|
09/30/2012
|
|
Machinery and equipment
|
|
$
|
501,856
|
|
|
$
|
83,881
|
|
Software and website development
|
|
|
66,190
|
|
|
|
0
|
|
Furniture and fixtures
|
|
|
26,492
|
|
|
|
6,873
|
|
Land
|
|
|
2,400,000
|
|
|
|
0
|
|
Warehouses
|
|
|
800,000
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment
|
|
|
3,794,538
|
|
|
|
90,754
|
|
Less accumulated depreciation
|
|
|
(279,614
|
)
|
|
|
(67,767
|
)
|
|
|
|
|
|
|
|
|
|
Net property and equipment
|
|
$
|
3,514,924
|
|
|
$
|
22,987
|
|
Depreciation
expense for the six months ended March 31, 2013 and 2012 was $39,223 and $1,400, respectively.
Land
valued at $2,400,000 as of December 31, 2012, 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 our President at an appraised value of $9,963 per acre.
Warehouses
include two properties whose total value is $800,000 as of December 31, 2012. 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
President 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, 2013 and September 30, 2012, respectively.
|
|
Crop Resources LLC
|
|
Partnership
|
|
|
|
|
Percentage of Ownership
|
|
|
19
|
%
|
Book Equity 9/30/2012
|
|
$
|
19,798
|
|
Share of Net Income/(Loss)
|
|
|
167
|
|
|
|
|
|
|
Book Equity 3/31/2013
|
|
|
19,965
|
|
NOTE
11 – NOTES PAYABLE
At
fiscal quarter ended March 31, 2013, the Company had notes payable in the amount of $6,105,984, compared to $314,525 as of
September 30, 2012. The notes included a note payable to an affiliated company of one of our 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. The second note payable is to our President in the amount of $291,267, is secured by the Company’s ownership in
Aistiva Corporation, carries accrued interest of 6% and is due on December 28, 2013. A third note payable is to our President
in the amount of $2,120,000 is unsecured, carries an interest rate of 3% and is due on demand. A fourth note payable is to
our President in the amount of $150,000, is unsecured, carries an interest rate of 5% and is due on demand. A fifth note
payable is to our President in the amount of $340,000, is unsecured, carries an interest rate of 3% and is due on demand. A
sixth note payable is to a company under the control of our President in the amount of $500,000, is secured by real estate,
carries an interest rate of 6% and is due in September 2017. A seventh note payable is to a company under the control of our
President in the amount of $2,400,000, is secured by real estate, carries an interest rate of 6% and is due in September
2018. An eighth note payable is to an unaffiliated party in the amount of $275,763, is secured by real estate, carries an
interest rate of 6% and is due in January 2015.
NOTE
12 – CUSTOMER DEPOSITS
As
of March 31, 2013 and September 30, 2012, the Company had customer deposits of $223,293 and $0, respectively, representing
payments received for orders not yet shipped.
NOTE
13 – SHAREHOLDERS’ EQUITY
On
October 9, 2012, the Company issued 21,483,871 shares of common stock to Asher Enterprises, Inc to retire $13,320.00 in debt
and accrued interest.
On
November 11, 2012, the Company issued 25,548,889 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 120,000,000 shares of common stock to four shareholders to retire a total of $95,182.16
in debt and accrued interest.
On
December 28, 2012, the Company returned 5,555,556 shares of common stock to treasury from TCA Global Credit Master Fund, LP originally
issued as incentive shares valued at $25,000 pursuant to a securities purchase agreement.
On
December 31, 2012, the Company issued 25,000,000 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 15,000,000 shares of common stock as compensation for rendered professional services valued
at $15,000.
On
December 31, 2012, the Company issued 5,000,000 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 the shareholders of Verity Farms
II, Inc. valued at $4,850,000 pursuant to a share exchange agreement.
NOTE
14 – CONCENTRATIONS
At
March 31, 2013, 16.4% of the Company’s accounts receivable was due from a single customer. During the six months ended March
31, 2013, 58% of the Company’s service revenue was generated from a single customer, and 6.6% of sales revenue was generated
from a single customer. Compared to total revenue, 6.6% was generated from a single customer during the six months ended March
31, 2013, compared to the six months ended March 31, 2012, where 2% of the Company’s revenues were generated from a single
customer.
NOTE
15 – INCOME TAXES
At
March 31, 2013, the Company has federal net operating loss carryovers of approximately $2,344,000 available to offset future taxable
income and expiring as follows: $2,320 in 2026, $12,616 in 2027, $127,675 in 2028, $37,465 in 2029, $428,000 in 2030, $564,000
in 2031, and $1,172,000 in 2032. The Company also has a federal contribution carryover of $150 that expires in 2029. At March
31, 2013, the Company has experienced losses since inception and has not yet generated any taxable income; therefore, the Company
established a valuation allowance to offset the net deferred tax assets. The income tax provision consists of the following components
for the six months ended March 31, 2013 and 2012:
|
|
|
2013
|
|
|
|
2012
|
|
Current income tax expense (benefit)
|
|
$
|
—
|
|
|
$
|
—
|
|
Deferred income tax expense (benefit)
|
|
|
—
|
|
|
|
—
|
|
Net income tax expense (benefit) charged to operations
|
|
$
|
—
|
|
|
$
|
—
|
|
The
income tax provision differs from the amounts that would be obtained by applying the federal statutory income tax rate to loss
before income tax provision as follows for the six months ended March 31, 2013 and 2012:
|
|
2013
|
|
|
2012
|
|
Loss before income tax provision
|
|
$
|
(6,613,206
|
)
|
|
$
|
(221,347
|
)
|
Less loss on goodwill impairment
|
|
|
(5,790,922
|
)
|
|
|
0
|
|
Taxable Income (Loss)
|
|
|
(822,284
|
)
|
|
|
(221,347
|
)
|
Expected federal income tax rate
|
|
|
15.0
|
%
|
|
|
15.0
|
%
|
Expected income tax expense (benefit) at statutory rate
|
|
$
|
(123,343
|
)
|
|
$
|
(33,202
|
)
|
Tax effect of:
|
|
|
|
|
|
|
|
|
Meals and entertainment
|
|
|
88
|
|
|
|
2,518
|
|
Change in valuation allowance
|
|
|
123,255
|
|
|
|
30,684
|
|
Net income tax expense (benefit)
|
|
$
|
—
|
|
|
$
|
—
|
|
The
Company’s deferred tax assets, deferred tax liabilities, and valuation allowance are as follows:
|
|
March 31, 2013
|
|
Deferred tax assets:
|
|
|
|
|
Organization costs
|
|
$
|
60
|
|
Contribution carryover
|
|
|
23
|
|
Net operating loss carryovers
|
|
|
33,220
|
|
Total deferred tax assets
|
|
$
|
33,303
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
Book basis of patent application
|
|
$
|
(5,246
|
)
|
Tax depreciation in excess of book
|
|
|
(498
|
)
|
Total deferred tax liabilities
|
|
$
|
(5,744
|
)
|
|
|
|
|
|
Total deferred tax assets
|
|
$
|
33,303
|
|
Total deferred tax liabilities
|
|
|
(5,744
|
)
|
Valuation allowance
|
|
|
(27,559
|
)
|
Net deferred tax asset (liability)
|
|
$
|
—
|
|
NOTE
16 – SUBSEQUENT EVENTS
Effective
on April 4, 2013, Verity Corp., a Nevada corporation formerly known as AquaLiv Technologies, Inc. filed a Certificate of Amendment
to Articles of Incorporation to: (i) change the name of the Company to Verity Corp and (ii) effectuate a 1-for-100 reverse stock
split of the Company’s common stock. On April 3, 2013, the Company received notice from Financial Industry Regulatory
Authority (“FINRA”) that the Actions have been approved and will take effect on April 4, 2013 (the “Effective
Date”).
On
April 12, 2013, the Company entered into an agreement with Maxim Group LLC (“Maxim”), whereby Maxim will provide general
financial advisory and investment banking services to the Company.
On
April 12, 2013, the Company issued 345,904 shares of common stock to Maxim Group LLC as compensation for their consulting services
valued at $172,952.00.