UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended: June 30, 2014

 

or

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

VERITY CORP.

(Exact name of registrant as specified in its charter)

 

Nevada		333-147367		38-3767357
(State or other jurisdiction of incorporation or organization)		(Commission File Number)		(I.R.S. Employer Identification Number)

 

47184 258^th Street

Sioux Falls, SD 57107

(Address of principal executive offices, including zip code)

 

(605) 543-5985

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the last 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [  ] No [X]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer [  ]	Accelerated Filer [  ]
Non-Accelerated Filer [  ]	Smaller reporting company [X]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

As of August 20, 2014, the registrant had 10,177,201 shares of its common stock outstanding.

 

 

 

VERITY CORP.

FOR THE QUARTER ENDED

JUNE 30, 2014

 

TABLE OF CONTENTS

 

	PART I – FINANCIAL INFORMATION
Item 1.	Financial Statements	F-1
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	7
Item 4.	Controls and Procedures	7
	PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	8
Item 1A.	Risk Factors	8
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	8
Item 3.	Defaults Upon Senior Securities	8
Item 4.	Mine Safety Disclosures	8
Item 5.	Other Information	8
Item 6.	Exhibits	8

 

 

Part 1 - Financial Information

 

Item 1. Financial Statements

 

VERITY CORP.

AND ITS SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

		June 30, 2014				September 30, 2013
		(unaudited)				(audited)
ASSETS
CURRENT ASSETS:
Cash		$	129,773			$	94,503
Accounts receivable			699,019				149,743
Inventory			653,586				576,266
Prepaid expenses			142,909				136,391
Other receivables			16,256				16,747
Total Current Assets			1,641,543				973,650
FIXED ASSETS
Land			-				2,400,000
Building			300,000				800,000
Accumulated depreciation - Building			(26,667	)			(41,667	)
Property, plant, and equipment			686,544				607,973
Accumulated depreciation - PP&E			(377,353	)			(312,313	)
Net Fixed Assets			582,525				3,453,993
OTHER ASSETS
Investment in Crop Resources			19,965				19,965
Total Other Assets			19,965				19,965
TOTAL ASSETS		$	2,244,032			$	4,447,608
LIABILITIES AND STOCKHOLDERS’ (DEFICIT)
CURRENT LIABILITIES:
Accounts payable			880,571				209,938
Credit cards payable			36,501				38,058
Customer deposits			10,241				10,241
Notes payable			147,122				100,956
Notes payable - related party			541,267				3,636,267
Real estate loans, current portion			11,503				11,503
Real estate loans, current portion- related party			-				717,670
Accrued interest payable			246,802				283,674
Total Current Liabilities			1,874,007				5,008,306
LONG TERM LIABILITIES:
Real estate loans, net current portion			251,047				259,623
Related Party Note Payable			3,710,000				2,182,330
			3,961,047				2,441,953
Total Liabilities			5,835,054				7,450,259
STOCKHOLDERS’ DEFICIT:
Preferred stock, $0.001 par value, 50,000,000 shares authorized
Series A Preferred, $0.001 par value, 331,618 and 331,618 shares issued and outstanding, respectively			332				332
Series B Preferred, $0.001 par value, 4,750,006 and 4,850,000 shares issued and outstanding, respectively			4,750				4,850
Series C Preferred, $0.001 par value, 51 and 51 shares issued and outstanding, respectively			0				-
Common stock, $0.001 par value, 1,000,000,000 shares authorized 10,177,201 and 9,177,201 shares issued and outstanding, respectively *			10,178				9,178
Capital in excess of par value			7,928,101				7,929,001
Retained earnings (Deficit)			(11,413,821	)			(10,828,681	)
Noncontrolling interest			(120,561	)			(117,331	)
Total Stockholders’ (Deficit)			(3,591,022	)			(3,002,651	)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT		$	2,244,032			$	4,447,608

 

* Reflects a 1:100 reverse stock split on 4/4/2013

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

VERITY CORP.

AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2014 AND 2013

 

		For the Three Months								For the Nine Months
		Ended June 30,								Ended June 30,
		2014				2013				2014				2013
REVENUES:
Sales		$	1,749,439			$	1,428,021			$	2,440,336			$	2,108,885
Service			-				-				-				-
Total Revenues			1,749,439				1,428,021				2,440,336				2,108,885
COST OF GOODS SOLD			1,029,706				742,951				1,347,798				1,151,874
GROSS PROFIT			719,733				685,070				1,092,539				957,011
OPERATING EXPENSES:
Consulting fees			425				23,500				850				210,500
Depreciation			14,870				37,917				87,857				77,140
Management fees			-				-				-				41,265
Marketing and advertising			30,782				34,815				63,976				82,802
Payroll expense			502,028				347,878				966,748				684,071
Professional fees			116,323				242,206				224,833				400,920
Rent			42,562				32,426				77,311				90,106
Repairs and maintenance			5,309				11,801				22,088				23,882
Research and development			5,701				4,265				25,989				13,457
Travel, meals, and entertainment			92,901				52,030				144,583				105,625
Other general and administrative			152,545				115,336				255,000				250,676
Total Operating Expenses			963,466				902,174				1,869,235				1,980,444
LOSS FROM OPERATIONS			(243,733	)			(217,104	)			(776,696	)			(1,023,433	)
OTHER INCOME (EXPENSE):
Loss on Derivative liability
Interest expense			116,515				(39,370	)			(34,886	)			(82,141	)
Misc. Other Income (Expense)			-				(42,094	)			2,027				(42,530	)
LOSS BEFORE INCOME TAX PROVISION			(127,218	)			(298,568	)			(809,555	)			(1,148,104	)
PROVISION FOR INCOME TAXES			-				-				-				-
CONSOLIDATED NET LOSS			(127,218	)			(298,568	)			(809,555	)			(1,148,104	)
Loss on goodwill impairment, Verity Farms			-				152,611				-				5,943,533
Loss on discontinued operations							35,053								7,799
Net loss (income) attributable to non-controlling interest, Aistiva			2,927				8,710				6,156.37				74,686
NET LOSS ATTRIBUTABLE TO COMPANY		$	(124,291	)		$	(477,522	)		$	(803,399	)		$	(7,024,750	)
BASIC LOSS PER SHARE		$	(0.01	)		$	(0.06	)		$	(0.09	)		$	(1.01	)
WEIGHTED AVERAGE SHARES OUTSTANDING			9,150,534				7,692,867				9,288,312				6,948,239

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

VERITY CORP.

AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED JUNE 30, 2014 AND 2013

 

		For the nine months
		Ended June 30,
		2014				2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(803,399	)		$	(7,024,750	)
Adjustments to reconcile net loss to net cash by operating activities:
Noncontrolling interest in income of consolidated subsidiary			(6,156	)			(74,686	)
Depreciation			87,857				77,140
Issuance of stock for services received			-				216,788
Loss on goodwill impairment, Verity Farms			-				5,943,533
Net (increase) decrease in operating assets:
Accounts receivable			(549,276	)			(384,177	)
Inventory			(77,320	)			(573,070	)
Other receivable			492				(12,221	)
Prepaid expense			(6,518	)			(120,891	)
Net increase (decrease) in operating liabilities:
Accounts payable			670,633				112,164
Credit cards payable			(1,557	)			41,157
Customer deposits			46,167				43,005
Other liabilities			146,455				253,290
Net Cash Provided (Used) by Operating Activities			(492,622	)			(1,502,718	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for property, equipment			(78,571	)			(41,602	)
Payments for Verity acquisition			-				(4,850,000	)
Net Cash Provided (Used) by Investing Activities			(78,571	)			(4,891,602	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes			-				6,574,767
Proceeds from notes-related party			615,000				0
Payments for notes			(8,577	)			(320,034	)
Proceeds of capital stock issuance			0				227,474
Net Cash Provided by Financing Activities			606,423				6,482,207
NET INCREASE (DECREASE) IN CASH			35,270				87,887
CASH AT BEGINNING OF PERIOD			94,503				7,519
CASH AT END OF PERIOD		$	129,773			$	95,406
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest		$	9,424			$	-
Income taxes		$	-			$	-
NON-CASH INVESTING AND FINANCING ACTIVITIES
Issuance of stock to retire notes payable, derivative liability, and accrued interest						$	276,282
Issuance of preferred stock for acquisition		$	-			$	4,850,000

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

VERITY CORP AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

AS OF JUNE 30, 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 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 June 30, 2014 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 June 30, 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 nine months ended June 30, 2014.

 

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 June 30, 2014 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 nine months ended June 30, 2014.

 

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.

 

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 nine months ended June 30, 2014.

 

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

 

In April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The amendments in this Update change the requirements for reporting discontinued operations in Subtopic 205-20.

 

Under the new guidance, a discontinued operation is defined as a disposal of a component or group of components that is disposed of or is classified as held for sale and “represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.” The ASU states that a strategic shift could include a disposal of (i) a major geographical area of operations, (ii) a major line of business, (iii) a major equity method investment, or (iv) other major parts of an entity. Although “major” is not defined, the standard provides examples of when a disposal qualifies as a discontinued operation.

 

The ASU also requires additional disclosures about discontinued operations that will provide more information about the assets, liabilities, income and expenses of discontinued operations. In addition, the ASU requires disclosure of the pre-tax profit or loss attributable to a disposal of an individually significant component of an entity that does not qualify for discontinued operations presentation in the financial statements.

 

The ASU is effective for public business entities for annual periods beginning on or after December 15, 2014, and interim periods within those years.

 

In May 2014, the FASB has issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”. The guidance in this update supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition.” In addition, the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract with a customer (for example, assets within the scope of Topic 360, Property, Plant, and Equipment, and intangible assets within the scope of Topic 350, Intangibles—Goodwill and Other) are amended to be consistent with the guidance on recognition and measurement (including the constraint on revenue) in this Update. Under the new guidance, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments in ASU No, 2014-09 are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. We do not believe the adoption of this update will have a material impact on our financial statements.

 

Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying 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 June 30, 2014, the Company had a retained deficit of $11,413,821 and current liabilities in excess of current assets by $232,464. During the nine months ended June 30, 2014, the Company incurred a net loss of $803,399 and incurred negative cash flows from operations of $492,622. 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 June 30, 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 June 30, 2014 is $19,551. A second note payable to our Board Member in the amount of $3,220,000, carries an interest rate of 3% and is due in annual payments of $1,073,333 beginning September 30, 2017. The interest accrued, but not paid as of June 30, 2014 is $175,474. The second note payable was modified on May 16, 2014 to extend the maturity date of the loan and interest payment due dates. The $3,220,000 note payable due dates have been extended to 3 annual principal payments of $1,073,333 beginning September 30, 2017. 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, accrued unpaid interest will be due on or before September 30, 2016, 2017, 2018 and 2019. A third note payable to our Board Member in the amount of $150,000, carries an interest rate of 5% and is due in annual principal payments of $50,000 beginning September 30, 2017. The interest accrued but not paid as of June 30, 2014 is $17,779. The third note payable was modified on May 16, 2014 to extend the maturity date of the loan and interest payment due dates. The $150,000 note payable due dates have been extended to 3 annual principal payments of $50,000 beginning September 30, 2017. Accrued interest from December 31, 2012 to September 30, 2015 will be due and payable on or before September 30, 2015, accrued unpaid interest will be due annually on September 30, 2016, 2017, 2018 and 2019.A fourth note payable to our Board Member in the amount of $340,000, carries an interest rate of 3% and is due in annual payments of $113,333 beginning September 30, 2017. The interest accrued but not paid as of June 30, 2014 is $28,575. The fourth note payable was modified on May 16, 2014 to extend the maturity date of the loan and interest payment due dates. The $340,000 note payable due dates have been extended to 3 annual principal payments of $113,333 beginning September 30, 2017. Accrued interest from December 31, 2012 to September 30, 2015 will be due and payable on or before September 30, 2015, accrued unpaid interest will be due annually on September 30, 2016, 2017, 2018 and 2019.

 

During 2014, a fifth note payable of $200,000, unsecured, due to our Board Member with an interest rate of 3% and due on demand was entered into. Interest accrued but not paid as of June 30, 2014 was $5,423.

 

The Company and its subsidiaries granted security interests to Mr. Spader in substantially all of the Company’s and subsidiaries assets on May 16, 2014.

 

 

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 June 30, 2014 and September 30, 2013:

 

			06/30/2014				09/30/2013
Gross accounts receivable from customers		$	707,603			$	158,327
Allowance for doubtful customer accounts			(8,584	)			(8,584	)
Accounts receivable, net		$	699,019			$	149,743

 

The bad debt expenses of $5,057 and $0 were recognized during the nine months ended June 30, 2014 and 2013, respectively, in the accompanying consolidated statements of operations.

 

 

NOTE 7 – INVENTORIES

 

Inventories as of June 30, 2014 and September 30, 2013 consisted of the following:

 

			06/30/2014				9/30/2013
Raw materials		$	60,432			$	75,357
Work in Process			51,892
Finished goods			577,503				534,539
			689,827				609,896
Allowance for obsolete inventories			(36,241	)			(33,630	)
Inventories, net		$	653,586			$	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 $2,611 and $0 during the nine months ended June 30, 2014 and 2013, respectively.

 

NOTE 8 – PREPAID EXPENSES

 

As of June 30, 2014 and September 30, 2013, the Company had prepaid expenses of $142,909 and $136,391, respectively, and consisted of the following:

 

			06/30/2014				9/30/2013
Prepaid insurance		$	52,576			$	44,017
Prepaid inventories			90,333				92,374
Total		$	142,909			$	136,391

 

NOTE 9 – FIXED ASSETS

 

			06/30/2014				9/30/2013
Machinery and equipment		$	591,869				513,298
Software and website development			68,184				68,184
Furniture and fixtures			26,491				26,491
							2,400,000
Warehouse			300,000				800,000
Total property and equipment			986,544				3,807,973
Less accumulated depreciation			(404,020	)			(353,980	)
Net property and equipment		$	582,525				3,453,993

 

Depreciation expense for the nine months ended June 30, 2014 and 2013 was $87,857 and $77,140, respectively.

 

Warehouse includes a property whose total value is $300,000 as of June 30, 2014. The 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.

 

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.

 

 

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 06/30/2014			19,965

 

NOTE 11 – NOTES PAYABLE

 

Note payable- related party: At June 30, 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 June 30, 2014 is $19,551. A second note payable to our Board Member in the amount of $3,220,000, carries an interest rate of 3% and is due in annual payments of $1,073,333 beginning September 30, 2017. The interest accrued, but not paid as of June 30, 2014 is $175,474. The second note payable was modified on May 16, 2014 to extend the maturity date of the loan and interest payment due dates. The $3,220,000 note payable due dates have been extended to 3 annual principal payments of $1,073,333 beginning September 30, 2017. 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, accrued unpaid interest will be due on or before September 30, 2016, 2017, 2018 and 2019. A third note payable to our Board Member in the amount of $150,000, carries an interest rate of 5% and is due in annual principal payments of $50,000 beginning September 30, 2017. The interest accrued but not paid as of June 30, 2014 is $17,779. The third note payable was modified on May 16, 2014 to extend the maturity date of the loan and interest payment due dates. The $150,000 note payable due dates have been extended to 3 annual principal payments of $50,000 beginning September 30, 2017. Accrued interest from December 31, 2012 to September 30, 2015 will be due and payable on or before September 30, 2015, accrued unpaid interest will be due annually on September 30, 2016, 2017, 2018 and 2019.A fourth note payable to our Board Member in the amount of $340,000, carries an interest rate of 3% and is due in annual payments of $113,333 beginning September 30, 2017. The interest accrued but not paid as of June 30, 2014 is $28,575. The fourth note payable was modified on May 16, 2014 to extend the maturity date of the loan and interest payment due dates. The $340,000 note payable due dates have been extended to 3 annual principal payments of $113,333 beginning September 30, 2017. Accrued interest from December 31, 2012 to September 30, 2015 will be due and payable on or before September 30, 2015, accrued unpaid interest will be due annually on September 30, 2016, 2017, 2018 and 2019.

 

During 2014, a fifth note payable of $200,000, unsecured, due to our Board Member with an interest rate of 3% and due on demand was entered into. Interest accrued but not paid as of June 30, 2014 was $5,423.

 

The Company and its subsidiaries granted security interests to Mr. Spader in substantially all of the Company’s and subsidiaries assets on May 16, 2014.

 

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.

 

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 June 30, 2014, the balance of this loan is $262,550 and the Company has paid $9,424 in interest during the nine months ended June 30, 2014.

 

Principal maturities of these loans payable for the next five years and thereafter are as follows:

 

Years ended September 30,			Principal
2014				541,267
2015				262,550
2016				0
2017				1,236,666
2018				1,236,666
Thereafter				1,236,667
				4,513,815

 

 

NOTE 12 – CUSTOMER DEPOSITS

 

As of June 30, 2014 and September 30, 2013, the Company had customer deposits of $10,241 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 the 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 Mututal 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.

 

On June 13, 2014, 1 preferrd shareholder converted 100,000 Series B Convertible shares to 1,000,000 common shares.

 

The company didn’t issue any stock for the nine months ended June 30, 2014.

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

This quarterly report on Form 10-Q and other reports filed by Verity Corp. (the “Company”) from time to time with the SEC (collectively, the “Filings”) contain or may contain forward-looking statements and information that are based upon beliefs of, and information currently available to, the Company’s management. Readers are cautioned not to place undue reliance on these forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. These statements relate to future events or our future financial performance. We have attempted to identify forward-looking statements by terminology including “anticipates,” “believes,” “expects,” “can,” “continue,” “could,” “estimates,” “intends,” “may,” “plans,” “potential,” “predict,” “should” or “will” or the negative of these terms or other comparable terminology. These statements are only predictions; uncertainties and other factors may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels or activity, performance or achievements expressed or implied by these forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Our expectations are as of the date this Form 10-Q is filed, and we do not intend to update any of the forward-looking statements after the date this Quarterly Report on Form 10-Q is filed to confirm these statements to actual results, unless required by law.

 

Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results.

 

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our financial statements would be affected to the extent there are material differences between these estimates and actual results. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting any available alternative would produce a materially different result. The following discussion should be read in conjunction with our financial statements and notes thereto appearing elsewhere in this report.

 

 

Overview

 

Business

 

Our Company

 

OVERVIEW

 

Verity Corp. (the “Company”) is a natural-oriented, technologically sophisticated Agribusiness Services company. The Company’s products and services support Crop Production and Animal Production. 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 products and services focused from Soil to Plate Food Production 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:

 

a.	a portfolio of best-in-market hard products that can be widely used by either conventional or organic/non-GMO farms to:

 

	d)	improve the quality of grain, livestock & aquaculture production;
	e)	reduce growing costs; while
	f)	maintaining production yields.

 

b.	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 Agriculture and Food Market.

 

ORGANIZATION & OPERATIONS

 

The Company is organized into 3 divisions: Verity Agriculture Products & Soil Preservation; Verity Water Systems; and Verity Consumer Products. These distinct divisions work are interlinked by one sales team, located, across the US, 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 production and supply issues, 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 Division remains in test / pre-production mode. The Company’s Agriculture Products & 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 have gained momentum in preceding years.

 

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.

 

In FY 2014, the Company has: rolled out a distinctive “best-in-market” line of Hard Products for use by farmers of any size, from family farms to large integrated agribusiness companies. The Company has focused management attention & Company resources to implementing a new “Top Down” strategy that will compliment 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 to the farmers 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” to them; and
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 near-term sales in FY2014. 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 sales in the intermediate term of FY2014 & FY2015.

 

COMPETITION

 

Verity Corporation 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.

 

 

Results of Operations

 

For the Nine Months Ended June 30, 2014 compared with the Nine Months Ended June 30, 2014.

 

Revenues

 

Revenues for the nine months ended June 30, 2014 totaled $2,440,336 as compared to $2,108,885 for the nine months ended June 30, 2014. Revenues increased 15.72% as compared to the nine months ended June 30, 2013.

 

Revenue Recognition is accounted for as follows: Sales revenue is billed and shipped in the same period each month and service revenue is billed in advance on the first day of the month that service is rendered.

 

Cost of Goods Sold

 

Cost of goods sold for the nine months ended June 30, 2014 was $1,347,798 as compared to $1,151,874 for the nine months ended June 30, 2013. The increase in cost of goods sold is due to increased sales. Gross Margin for the nine months ended June 30, 2014 was 45%. And Gross Margin for the nine months ended June 30, 2013 was 45%. Gross Margin percentages have maintained at 45% for the nine months ended June 30.

 

Operating Expenses

 

Operating expenses for the nine months ended June 30, 2014 totaled $1,869,235 as compared to $1,980,444 for the nine months ended June 30, 2013. The decrease in operating expenses is directly related to a reduction in consulting and professional fees of $385,737. The reduction in consulting and professional fees is offset by an increase in payroll expenses of $282,677 and in increase in travel of $38,958. Research and Development expenses increased $12,532 during the nine months ended June 30, 2014. Marketing and advertising expenses decreased $18,826, rent decreased $12,795, management fees decreased $41,265 and all other expenses increased $13,247.

 

Interest Expense

 

Interest Expense for the nine months ended June 30, 2014 was $34,886 as compared to $82,141 for the nine months ended June 30, 2014. The decrease in interest expense is directly related to the return of land and building to a board member that resulted in a reduction of accrued interest due of $232,000..

 

Net Loss Before Provision for Income Taxes

 

The net loss for the nine months ended June 30, 2014 was $803,399 as compared to a net loss of $1,081,217 before loss on goodwill impairment of $5,943,533 for the nine months ended June 30, 2013. The decrease in operating net loss is based on increased revenues at consistent gross margins for product sales and a decrease in operating expenses as mentioned above.

 

Liquidity and Capital Resources

 

Cash flows used by operating activities were $492,622 for the nine months ended June 30, 2014 as compared to $1,502,718 for the nine months ended June 30, 2014. Negative cash flow is a direct result of operating expenses exceeding revenues generated during the nine months ended June 30, 2014 and 2013.

 

Cash Flows used by Investing Activities was $78,571 for purchases of equipment during the nine months ended June 30, 2014. For the nine months ended June 30, 2014, cash flows from investing activities was $4,891,602 for the purchase of land, building and equipment.

 

Cash Flows provided by financing activities were $606,423 for the nine months ended June 30, 2014 and $6,482,207 for the nine months ended June 30, 2014. The cash provided by financing activities was related to proceeds received from notes payable.

 

As of June 30, 2014, Verity did not have and continues to not have sufficient cash on hand to pay present obligations as they become due. In addition, there is no assurance that we will be able to raise additional capital on acceptable terms, if at all, to meet our current obligations over the next 12 months. Because of the foregoing, Verity’s auditors expressed substantial doubt about our ability to continue as a going concern in the September 30, 2013 Audit report.

 

 

If we obtain additional funds by selling any of our equity securities or by issuing common stock to pay current or future obligations, the percentage ownership of our stockholders will be reduced, stockholders may experience additional dilution, or the equity securities may have rights preferences or privileges senior to the common stock. If adequate funds are not available to us on satisfactory terms, we may be required to cease operating or otherwise modify our business strategy. Our estimated working capital requirement for the next 12 months, based on current assumptions and conditions, is approximately $1,500,000.

 

Management has determined that general expenditures must be reduced unless revenue growth is obtained. Additional capital will be required in the form of equity or debt securities to maintain operations. In addition, if the Company cannot raise additional short term capital, the Company will be forced to continue to further accrue liabilities due to our limited cash reserves. There are no assurances that management will be able to raise capital on terms acceptable to the Company. If the Company is unable to obtain sufficient amounts of additional capital, we may be required to reduce the scope of our planned development, which could harm our business, financial condition and operating results. If the Company obtains additional funds by selling any of our equity securities of by issuing common stock to pay current or future obligations, the percentage ownership of our shareholders will be reduced, shareholders may experience additional dilution, or the equity securities may have rights preferences or privileges senior to the common stock. If adequate funds are not available to us when needed on satisfactory term, the Company may be required to cease operating or otherwise drastically modify the business strategy.

 

Off-Balance Sheet Arrangements

 

There are no off-balance sheet arrangements

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Verity Corp. does not hold any derivative instruments and do not engage in any hedging activities.

 

Item 4. Controls and Procedures

 

(a) Evaluation of Disclosure and Control Procedures

 

Pursuant to Rule 13a- 15(b) under the Exchange Act, Verity carried out an evaluation, with the participation of Verity’s management, including Verity’s Principal Executive Officer (“PEO”) and Principal Financial Officer (“PFO”), of the effectiveness of Verity’s disclosure controls and procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, Verity’s PEO and PFO concluded that Verity’s disclosure controls and procedures were not effective to ensure that information required to be disclosed by Verity in the reports that Verity files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to Verity’s management, including Verity’s PEO and PFO, as appropriate, to allow timely decisions regarding required disclosure.

 

(b) Management’s Assessment of Internal Control over Financial Reporting

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the Exchange Act Rules 13a-15(f). A system of internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

 

Under the supervision and with the participation of management, including the principal executive officer and the principal financial officer, Verity’s management has evaluated the effectiveness of its internal control over financial reporting as of September 30, 2013, based on the criteria established in a report entitled “Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission” and the interpretive guidance issued by the Commission in Release No. 34-55929. Based on this evaluation, Verity’s management has evaluated and concluded that Verity’s internal control over financial reporting was ineffective as of September 30, 2013, and identified the following material weaknesses:

 

	●	The small size of our Company limits our ability to achieve the desired level of separation of internal controls and financial reporting. We do not have a separate PEO and PFO.
	●	We have not achieved the desired level of documentation of our internal controls and procedures. When Verity obtains sufficient funding, this documentation will be strengthened through utilizing a third party consulting firm to assist management with its internal control documentation and further help to limit the possibility of any lapse in controls occurring.

 

 

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of Verity’s annual or interim financial statements will not be prevented or detected on a timely basis.

 

Management intends to mitigate the risk of the material weaknesses going forward provided Verity has sufficient funding by utilizing external financial consulting services, in a more effective manner, prior to the review by our principal independent accounting firm to ensure that all information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported accurately and within the time periods specified in the Commission’s rule and forms.

 

(c) Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

Verity Corp. is not currently involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization of body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

 

Item 1A. Risk Factors.

 

Verity Corp takes the position that there are no changes that constitute material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended September 30, 2013., filed with the SEC on January 14, 2014.

 

Item 2. Unregistered Sales of Equity Securities

 

During the nine months ended June 30, 2014, the Company did not have any unregistered sales of equity securities.

 

Item 3. Defaults Upon Senior Securities

 

There have been no default in the payment of principal, interest, sinking or purchase fund installment, or any other material default, with respect to any indebtedness of the Company.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information

 

There is no other information required to be disclosed which was not previously disclosed.

 

ITEM 6. Exhibits

 

Exhibit No.		Description
31.1*		Certification of the Chief Executive Officer and Chief Financial Officer of Verity Corp, pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*		Certification of the Chief Executive Officer and Chief Financial Officer of Verity Corp., furnished pursuant to Section 1350 of Chapter 63 of 18 U.S.C. as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
EX-101.INS*		XBRL Instance Document
EX-101.SCH*		XBRL Taxonomy Extension Schema Document
EX-101.CAL*		XBRL Taxonomy Extension Calculation Linkbase
EX-101.DEF*		XBRL Taxonomy Extension Definition Linkbase
EX-101.LAB*		XBRL Taxonomy Extension Labels Linkbase
EX-101.PRE*		XBRL Taxonomy Extension Presentation Linkbase

 

* Filed herewith

 

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

	Verity Corp.
Date: August 20, 2014	By:	/s/ JIM WHITE
	Name:	Jim White
	Title:	Chief Executive Officer (Principal Executive Officer)
Date: August 20, 2014	By:	/s/ KEN WRIGHT
	Name:	Ken Wright
	Title:	Chief Financial Officer (Principal Financial Officer) (Principal Accounting Officer)