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MarketScreener Homepage  >  Equities  >  OTC Bulletin Board - Other OTC  >  Armeau Brands Inc    SSWH

ARMEAU BRANDS INC

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VERITAS FARMS : Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

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08/14/2019 | 05:14pm EDT

Unless the context otherwise requires, references in this report to " the Company ," " Veritas Farms ," " we ," " us " and " our " refer to Veritas Farms, Inc. and its subsidiary.




Forward-Looking Statements



Certain statements made in this report are " forward-looking statements " regarding the plans and objectives of management for future operations. Such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The forward-looking statements included herein are based on current expectations that involve numerous risks and uncertainties. Our plans and objectives are based, in part, on assumptions involving judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Although we believe that our assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the forward-looking statements included in this report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein particularly in view of the current state of our operations, the inclusion of such information should not be regarded as a statement by us or any other person that our objectives and plans will be achieved. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.




Business Overview



Veritas Farms is an entirely vertically integrated agribusiness focused on producing, marketing, and distributing highest purity full spectrum hemp products containing naturally occurring phytocannabinoids. Veritas Farms owns and operates a 140-acre farm in Pueblo, Colorado, capable of producing over 200,000 proprietary full spectrum hemp plants containing naturally occurring phytocannabinoids which yield a potential minimum annual harvest of over 200,000 pounds of outdoor-grown industrial hemp. While part of the cannabis family, hemp, which contains less than 0.3% tetrahydrocannabinol ("THC"), the psychoactive compound that produces the "high" in marijuana, is distinguished from marijuana by its use, physical appearance and lower THC concentration (marijuana generally has a THC level of 10% or more). The Company also operates approximately 15,000 sq. ft. of climate-controlled greenhouses in Pueblo, Colorado to produce a consistent supply of year-round indoor-cultivated hemp. In addition, there is a 10,000-sq. ft. onsite facility used for processing raw hemp, oil extraction, formulation laboratories, and quality/purity testing. That facility also houses our production, packaging and distribution operations. Veritas Farms is registered with the Colorado Department of Agriculture to grow industrial hemp and with the Colorado Department of Public Health and Environment to process hemp and manufacture hemp products in accordance with Colorado's hemp program.

Veritas Farms meticulously processes its hemp crop to produce superior quality whole-plant hemp oil, extracts and derivatives which contain the entire broad spectrum of cannabinoids extracted from the flowers and leaves of hemp plants. Whole-plant hemp oil is known to provide the essential phytocannabinoid "entourage effect" resulting from the synergistic absorption of the entire broad spectrum of unique hemp cannabinoids by the receptors of the human endocannabinoid system. As a result, Veritas Farms believes that its products are premier quality cannabinoids and are highly sought after by consumers and manufacturers of premium hemp products.

Veritas Farms has developed a wide variety of formulated hemp products containing naturally occurring phytocannabinoids which are marketed and distributed by the Company under its Veritas Farms™ brand name. Our products are also available in bulk, white label and private label custom formulations for distributors and retailers. These types of products are in high demand by health food markets, wellness centers, physicians and other healthcare practitioners.

Veritas Farms™ products (20+ SKUs) include vegan capsules, gummies, tinctures, lotions, salves, vape oils and oral syringes. All product applications come in various flavors and strength formulations, in addition to bulk. Many of the Company's whole-plant hemp oil products and formulations are available for purchase online directly from the Company through its Veritas Farms™ website, as well as through numerous other online retailers and " brick and mortar " retail outlets.




Corporate Information



The Company was incorporated in the state of Nevada on March 15, 2011 under the name " Armeau Brands Inc. " and changed its name to " SanSal Wellness Holdings, Inc. " effective November 7, 2017. Effective as of February 5, 2019, the Company changed its name from " SanSal Wellness Holdings, Inc. " to " Veritas Farms, Inc. "

Our executive offices are located at 1512 E. Broward Boulevard, Suite 300, Fort Lauderdale, FL 33301 and our telephone number is (561) 288-6603. Our corporate websites are www.theveritasfarms.com and www.sansalwellness.com . Information appearing on our websites is not part of this report.



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Results of Operations


Three months ended June 30, 2019 compared to three months ended June 30, 2018

Revenues. We had net sales for the three months ended June 30, 2019 of $2,971,345, as compared to $487,169 for the three months ended June 30, 2018, giving effect to the ramp up of commercial production and sale of newly branded Veritas Farms™ hemp extract products, and significant expansion of retail distribution in the 2019 quarter from the 2018 quarter as a result of increased sales and marketing efforts. Sales include bulk oils for wholesale, vegan capsules, tinctures, lotions, salves, vape oils, and oral syringes, all in various potency levels and flavors. We co-package in addition to marketing our own Veritas Farms™ brand product line. We anticipate the trend of increasing sales to continue through the balance of 2019.

Cost of Sales: All expenses incurred to grow, process, and package the finished goods are included in our cost of sales. Cost of sales increased to $1,447,932 for the three months ended June 30, 2019, from $317,695 for the comparable quarter in 2018, as a result of increased sales in the 2019 quarter. We had gross profit of $1,523,413 for the three months ended June 30, 2019, as compared to gross profit of $169,474 for the three months ended June 30, 2018.

Expenses. Selling, general and administrative expenses increased to $2,848,438 for the three months ended June 30, 2019, from $493,295 for the three months ended June 30, 2018, reflecting the expansion of operations as a result of the increased availability of capital during the 2019 quarter. General and administrative expenses consist primarily of administrative personnel costs, facilities expenses, professional fee expenses and marketing costs for our Veritas Farms™ brand products.

Interest expense for the three months ended June 30, 2019 was $7,990, $3,433 of which was attributable to loans from a principal shareholder, as compared to $4,313 for the three months ended June 30, 2018, $1,059 of which was attributable to loans from a principal shareholder.

As a result of the increase in operating, marketing and public company expenses incurred during the three months ended June 30, 2019, net loss for the three months ended June 30, 2019, increased to $1,333,015 or $0.01 per share based on 122,163,669 weighted average shares outstanding, from $328,134 or $0.01 per share for the three months ended June 30, 2018, based on 62,108.573 weighted average shares outstanding.

Six months ended June 30, 2019 compared to six months ended June 30, 2018

Revenues. We had net sales for the six months ended June 30, 2019 of $4,496,275, as compared to $818,585 for the six months ended June 30, 2018, giving effect to the ramp up of commercial production and sale of newly branded Veritas Farms™ hemp extract products, and significant expansion of retail distribution in the 2019 period from the 2018 period as a result of increased sales and marketing efforts. Sales include bulk oils for wholesale, vegan capsules, tinctures, lotions, salves, vape oils, and oral syringes, all in various potency levels and flavors. We co-package in addition to marketing our own Veritas Farms™ brand product line. We anticipate the trend of increasing sales to continue through the balance of 2019.

Cost of Sales: All expenses incurred to grow, process, and package the finished goods are included in our cost of sales. Cost of sales increased to $2,268,041 for the six months ended June 30, 2019, from $515,698 for the comparable period in 2018, as a result of increased sales in the 2019 period and a plant write off of $77,387 during the six months ended June 30, 2019. We had gross profit of $2,150,847 for the six months ended June 30, 2019, as compared to gross profit of $302,887 for the six months ended June 30, 2018.

Expenses. Selling, general and administrative expenses increased to $5,295,892 for the six months ended June 30, 2019, from $994,240 for the six months ended June 30, 2018, reflecting the expansion of operations as a result of the increased availability of capital during the 2019 period. General and administrative expenses consist primarily of administrative personnel costs, facilities expenses, professional fee expenses and marketing costs for our Veritas Farms™ brand products.

Interest expense for the six months ended June 30, 2019 was $14,894, $5,714 of which was attributable to loans from a principal shareholder, as compared to $14,003 for the six months ended June 30, 2018, $7,446 of which was attributable to loans from a principal shareholder. Other expenses during the six months ended June 30, 2018, period were offset by other income of $23,927 earned during the 2018 period.

As a result of the increase in operating, marketing and public company expenses incurred during the six months ended June 30, 2019, net loss for the six months ended June 30, 2019, increased to $3,159,939 or $0.03 per share based on 117,148,096 weighted average shares outstanding, from $681,429 or $0.01 per share for the six months ended June 30, 2018, based on 62,108.573 weighted average shares outstanding.



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Liquidity and Capital Resources

As of June 30, 2019, total assets were $12,579,773, as compared to $7,014,086 at December 31, 2018. Assets primarily increased due to significant increases in cash, accounts receivable and inventories.

Total current liabilities as of June 30, 2019 were $987,542, as compared to $738,476 at December 31, 2018. The increase was due in large part to increases in accounts payable, accrued expenses , current portion of right of use lease liability and current portion of long term debt, offset in part by the satisfaction of a $262,924 note receivable to a principal shareholder.

Net cash used in operating activities increased to $3,560,200 for the six months ended June 30, 2019, from $729,775 for the 2018 period. Results of operations, offset by increases in stock-based compensation and accounts payable comprised most of the change.

Net cash used in investing activities was $688,001 for the six months ended June 30, 2019 as compared to $-0- for the six months ended June 30, 2018, reflecting an increase in cash used for the purchase of property and equipment in the 2019 period.

Net cash provided by financing activities was $7,345,487 for six months ended June 30, 2019, primarily attributable to the proceeds from the exercises of outstanding warrants and an additional private offering undertaken during the 2019 period as described below. This compares to net cash provided by financing activities of $711,252 for the six months ended.

Our primary sources of capital to develop and implement our business plan have been the proceeds from private offerings of our equity securities, capital contributions made by members prior to completion of the September 2017 acquisition of 271 Lake Davis Holdings, LLC by the Company and loans from shareholders, including Erduis Sanabria, our Executive Vice President and a director. The shareholder loans which were evidenced by promissory notes issued to the lending shareholders, which accrued interest rates between 2% and 3% per annum which were paid in full by June 30, 2019

In June and July 2018, the Company completed a private offering (the "Private Offering") of 29,250,000 Units ("Units"), at a price of $0.10 per Unit or total gross proceeds of $2,950,000. In addition, a $175,000 ninety (90) day convertible budge promissory note issued by the Company in May 2018 to a single accredited investor in a private transaction, converted in accordance with its terms into 2,191,096 Units at the first closing of the Private Offering.

Each Unit consisted of (a) one share of the Company's common stock ("Shares"); and (b) one five-year common stock purchase warrant ("Warrants"). The Warrants entitle the holder thereof to purchase one Share at an exercise price of $0.15 during the five (5) year period following the closing of the subscriber's investment. The exercise price and number of Shares issuable upon exercise of the Warrants are be subject to anti-dilution adjustment in the event of stock splits, stock dividends and similar recapitalization events.

In order to raise additional capital, the Company solicited the exercise of the Warrants issued in the Private Offering. As of the date of this report 31,791,666 of the Warrants have been exercised, resulting in proceeds to the Company, net of warrant solicitation fees of $238,438, of $4,530,312.

Moreover, in April 2019, Veritas Farms commenced an additional private offering of its equity securities to "accredited investors" pursuant to Rule 506(c) promulgated under the Securities Act of 1933, as amended. The Company offered up to 25,000,000 "restricted" shares of its common stock on a "best efforts" (no minimum) basis at a price of $.40 per share, with the right to increase the maximum amount of the offering to 37,500,000 shares ($15,000,000). As of the date of this report, the Company has completed the additional private offering, in which it sold a total of 17,737,500 shares for total gross proceeds of $7,095,000, less offering expenses of $972,066, for net proceeds of $6,122,934.

The Company anticipates that additional financing, if and when required to fund the Company's growth will be generated from subsequent public or private offerings of its equity and/or debt securities. The Company does not intend to accept any further loans from shareholders. While we believe additional financing will be available to us as needed, there can be no assurance that equity financing will be available on commercially reasonable terms or otherwise, when needed. Moreover, any such additional financing may dilute the interests of existing shareholders. The absence of additional financing, when needed, could substantially harm the Company, its business, results of operations and financial condition.



Critical Accounting Policies



Revenue Recognition


In May 2014 the FASB issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes all existing revenue recognition requirements, including most industry specific guidance. This new standard requires a company to recognize revenues when it transfers goods or services to customers in an amount that reflects the consideration that the company expects to receive for those goods or services. The FASB subsequently issued the following amendments to ASU No. 2014-09 that have the same effective date and transition date: ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations; ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing; ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients; and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers. The Company adopted these amendments with ASU 2014-09 (collectively, the new revenue standards).



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The new revenue standards became effective for the Company on January 1, 2018 and were adopted using the modified retrospective method. The adoption of the new revenue standards as of January 1, 2018 did not change the Company's revenue recognition as the majority of its revenues continue to be recognized when the customer takes control of its product. As the Company did not identify any accounting changes that impacted the amount of reported revenues with respect to its product revenues, no adjustment to retained earnings was required upon adoption.

Under the new revenue standards, the Company recognizes revenues when its customer obtains control of promised goods or services, in an amount that reflects the consideration which it expects to receive in exchange for those goods. The Company recognizes revenues following the five-step model prescribed under ASU No. 2014-09: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) we satisfy the performance obligation.

Revenues from product sales are recognized when the customer obtains control of the Company's product, which occurs at a point in time, typically upon delivery to the customer. The Company expenses incremental costs of obtaining a contract as and when incurred if the expected amortization period of the asset that it would have recognized is one year or less or the amount is immaterial.



Property, Plant and Equipment


Purchase of property, plant and equipment are recorded at cost. Improvements and replacements of property, plant and equipment are capitalized. Maintenance and repairs that do not improve or extend the lives of property and equipment are charged to expense as incurred. When assets are sold or retired, their cost and related accumulated depreciation are removed from the accounts and any gain or loss is reported in the Statements of Operations. Depreciation is provided over the estimated economic useful lives of each class of assets and is computed using the straight-line method.

Impairment of Long-Lived Assets

The carrying value of long-lived assets are reviewed when facts and circumstances suggest that the assets may be impaired or that the amortization period may need to be changed. The Company considers internal and external factors relating to each asset, including cash flows, local market developments, industry trends and other publicly available information. If these factors and the projected undiscounted cash flows of the Company over the remaining amortization period indicate that the asset will not be recoverable, the carrying value will be adjusted to the fair market value.



Use of Estimates


The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates included deferred revenue, costs incurred related to deferred revenue, the useful lives of property and equipment and the useful lives of intangible assets.




Income Taxes



The Company was a limited liability company for income tax purposes until September 27, 2017, when the transaction discussed in " Nature of Business " under Note 1 to the Company's consolidated financial statements included in Item 1 of this report, occurred. In lieu of corporate income taxes, the owners were taxed on their proportionate shares of the Company's taxable income. Accordingly, no liability for federal or state income taxes and no provision for federal or state income taxes have been included in the financial statements up to that date.

The Company accounts for income taxes under ASC 740 Income Taxes. Under the asset and liability method of ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period the enactment occurs. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that the Company will not realize tax assets through future operations.

In accordance with Financial Accounting Standards Board ASC Topic 740, Income Taxes, management evaluated the Company's tax positions and concluded that the Company had taken no uncertain tax positions that require adjustment to the financial statements to comply with the provisions of this guidance. The Company is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress.

Effective September 27, 2017, the Company became taxed as a C-Corporation. Income tax benefits are recognized for income tax positions taken or expected to be taken in a tax return, only when it is determined that the income tax position will more-likely than-not be sustained upon examination by taxing authorities. The Company has analyzed tax positions taken for filings with the Internal Revenue Service and all tax jurisdictions where it operates. The Company believes that income tax filing positions will be sustained upon examination and does not anticipate any adjustments that would result in a material adverse effect on the Company's financial condition, results of operations or cash flows. Accordingly, the Company has not recorded any reserves, or related accruals for interest and penalties for uncertain income tax positions at December 31, 2018 and 2017.



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Off-Balance Sheet Arrangements

There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

© Edgar Online, source Glimpses

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Managers
NameTitle
Alexander M. Salgado CEO, Principal Financial & Accounting Officer
Dave Smith Chief Operating Officer
Erduis Sanabria Director & Executive Vice President
Jaitegh Singh Secretary & Vice President
Nicholas DiFrancesco Vice President-Medical, Sales & Marketing
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