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EX-32.1 - EXHIBIT 32.1 - SanSal Wellness Holdings, Inc.s110298_ex32-1.htm
EX-31.1 - EXHIBIT 31.1 - SanSal Wellness Holdings, Inc.s110298_ex31-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15 (d) OF THE SECURITIES AND EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2018

 

Commission file number: 333-191251

 

SanSal Wellness Holdings, Inc. 

(Exact name of registrant as specified in its charter)

 

Nevada 99-0375676
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)

 

 6610 North University Drive #220, Fort Lauderdale, FL 33321

(Address of Principal Executive Offices)

 

(954) 722-1300

(Registrant’s telephone number, including area code)

 

 

(Former name, former address and former fiscal year, if changed since last report)

 

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 past 90 days. Yes ☒  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 (ss.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 ☒

 

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

 

Large Accelerated Filer ☐ Accelerated Filer ☐
Non-accelerated Filer ☐ Smaller reporting company ☒
  Emerging growth company ☒

 

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

 

The number of shares outstanding of the registrant’s common stock, $0.001 par value, as of May 21, 2018 was 60,169,000 shares.

 

 

 

 

TABLE OF CONTENTS

 

      Page
       
PART I – FINANCIAL INFORMATION   1
       
Item 1. Financial Statements.   1
       
  Consolidated Balance Sheets as of March 31, 2018 and December 31, 2017 (unaudited)   1
       
  Consolidated Statements of Operations for the three months ended March 31, 2018 and 2017 (unaudited)   3
       
  Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and 2017 (unaudited)   4
       
  Notes to Consolidated Financial Statements (unaudited)   5
       
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.   19
       
Item 3. Quantitative Disclosures About Market Risk.   23
       
Item 4. Controls and Procedures.   23
       
PART II - OTHER INFORMATION   25
       
Item 1. Legal Proceedings.   25
       
Item 1A. Risk Factors.   25
       
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.   25
       
Item 3. Defaults Upon Senior Securities.    
       
Item 4. Mine Safety Disclosures.   25
       
Item 5. Other information.   25
       
Item 6. Exhibits.   25
       
SIGNATURES   26

 

 

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

SanSal Wellness Holdings, Inc. and Subsidiary
Consolidated Balance Sheets
(Unaudited)

 

 

 

   March 31,   December 31, 
ASSETS  2018   2017 
CURRENT ASSETS          
Cash and Cash Equivalents  $   $27,803 
Inventories   1,485,234    1,428,758 
Accounts Receivable   85,886    79,901 
Prepaid Expenses   30,370    42,094 
Total Current Assets  $1,601,490   $1,578,556 
           
PROPERTY PLANT AND EQUIPMENT, net of accumulated depreciation of $369,300 and $306,038, respectively  $3,545,922   $3,609,184 
           
Deposits  $23,000   $23,000 
           
TOTAL ASSETS  $5,170,412   $5,210,740 

 

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

 

 

1 

 

 

   March 31,   December 31, 
   2018   2017 
LIABILITIES AND STOCKHOLDERS' EQUITY        
CURRENT LIABILITIES          
Accounts Payable  $312,422   $245,082 
Accrued Expenses   220,000    159,904 
Accrued Interest - Related Parties   22,616    16,230 
Notes Payable - Related Parties   1,059,289    1,030,080 
Current Portion of Long Term Debt   548,078    551,191 
Total Current Liabilities  $2,162,405   $2,002,487 
           
           
LONG-TERM DEBT  $99,901   $99,966 
Total Liabilities  $2,262,306   $2,102,453 
           
STOCKHOLDERS' EQUITY          
Common Stock, $0.001 par value, 200,000,000 shares authorized, 60,169,000 and 59,895,000 shares issued and outstanding at March 31, 2018 and December 31, 2017 respectively          
   $60,169   $59,895 
Additional Paid in Capital   7,292,249    7,139,409 
Accumulated Deficit   (4,444,312)   (4,091,017)
Total Stockholders' Equity  $2,908,106   $3,108,287 
           
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY  $5,170,412   $5,210,740 

 

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

 

 

2 

 

 

SanSal Wellness Holdings, Inc. and Subsidiary

Consolidated Statements of Operations

(Unaudited)

 

 

   Three Months Ended March 31, 
   2018   2017 
         
Sales  $331,416   $264,450 
           
Cost of sales   198,003    131,190 
           
Gross profit  $133,413   $133,260 
           
Operating Expenses          
Selling, General and Administrative  $500,945   $373,414 
Total Operating Expenses  $500,945   $373,414 
Operating loss  $(367,532)  $(240,154)
           
Other Expense (Income)          
Merger Expenses  $   $163,403 
Interest Expense - Related Party   6,387     
Interest Expense - Other   3,303    8,205 
Other Income   (23,927)    
Total Other Expense (Income)   (14,237)   171,608 
           
Loss before Provision for Income Taxes  $(353,295)  $(411,762)
           
Income Tax Provision        
           
NET LOSS  $(353,295)  $(411,762)
           
Net Loss per Share  $(0.01)  $(0.01)
           
Weighted Average Shares Outstanding   60,060,978    58,500,000 

 

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

 

 

3 

 

 

SanSal Wellness Holdings, Inc. and Subsidiary 

Consolidated Statements of Cash Flows 

(Unaudited)

 

 

   Three Months Ended March 31,
   2018   2017 
CASH FLOWS FROM OPERATING ACTIVITIES          
Net Loss  $(353,295)  $(411,762)
Adjustments to Reconcile Net Loss to Net Cash Used Operating Activities          
Depreciation   63,262    49,611 
Stock-based Compensation   71,014     
Loss on Disposal of Property and Equipment       3,411 
Changes in Operating Assets and Liabilities          
Inventories   (56,476)   (264,844)
Prepaid Expenses   11,724    (27,363)
Accounts Receivable   (5,985)    
Deposits       (23,000)
Accrued Interest - Shareholders   6,386    6,342 
Accrued Expenses   60,096   175,918 
Accounts Payable   67,340    (1,530)
NET CASH USED IN OPERATING ACTIVITIES   (135,934)   (493,217)
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Purchase of Property and Equipment  $   $(192,863)
NET CASH USED IN INVESTING ACTIVITIES       (192,863)
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Payments on Long-term Debt  $(3,178)  $(2,993)
Distributions to Shareholders       (26,428)
Proceeds from Note Payable Stockholders   29,209     
Capital Contribution from Shareholders       1,161,350 
Proceeds from Issuance of Common Stock   82,100     
NET CASH PROVIDED BY FINANCING ACTIVITIES   108,131    1,131,929 
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS   (27,803)   445,848 
CASH AND CASH EQUIVALENTS - Beginning of Year   27,803    95,591 
CASH AND CASH EQUIVALENTS - End of Period  $   $541,439 
           
Supplemental Disclosure of Cash Flow Information:          
Cash Paid for Interest  $1,678   $1,862 
Cash Paid for Income Taxes  $   $ 
Non-Cash Financing Activities          
Distribution of Land Held for Investment  $   $18,397 

  

See Accompanying Notes to Consolidated Financial Statements (Unaudited)

 

 

4 

 

 

SanSal Wellness Holdings, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(Unaudited)

 

  

NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Business  

SanSal Wellness Holdings Inc. (the “Company”), was incorporated as Armeau Brands Inc. in the State of Nevada on March 15, 2011. On October 13, 2017, the Company filed Amended and Restated Articles of Incorporation with the Nevada Secretary of State changing the name from “Armeau Brands Inc.” to “SanSal Wellness Holdings, Inc.” The Company’s business objectives are to produce natural rich-hemp products, using strict natural protocols and materials yielding broad spectrum phytocannabinoid rich hemp oils, distillates and isolates. The Company is licensed by the Colorado Department of Agriculture to grow industrial hemp pursuant to Federal law on its farm.

 

Effective September 27, 2017, the Company acquired 100% of the issued and outstanding limited liability company membership interests of 271 Lake Davis Holdings LLC dba SanSal Wellness (“271 Lake Davis”) in exchange for 46,800,000 (7,800,000 pre-split) restricted shares of the Company’s common stock, which represented 100% of 271 Lake Davis’s total membership interests outstanding immediately following the closing of the transaction. The transaction has been accounted for as a reverse merger, whereby 271 Lake Davis is the accounting survivor and the historical financial statements presented are those of 271 Lake Davis.

 

Sansal, LLC was a wholly owned subsidiary that was merged into 271 Lake Davis Holdings, LLC in January 2016.

 

Basis of Presentation

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements and with the instructions to Form 10-Q and Article 8 of Regulation S-X of the United States Securities and Exchange Commission (the “SEC”). Accordingly, they do not contain all information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of the Company’s management, the accompanying unaudited financial statements contain all the adjustments necessary (consisting only of normal recurring accruals) to present the financial position of the Company as of March 31, 2018, and the results of operations and cash flows for the periods presented. The results of operations for the three months ended March 31, 2018, are not necessarily indicative of the operating results for the full fiscal year or any future period. These unaudited consolidated financial statements should be read in conjunction with the financial statements and related notes thereto included in the Form 10-K for the year ended December 31, 2017, filed with the SEC on April 23, 2018.

 

Principles of Consolidation

The accompanying consolidated financial statements reflect the accounts of Sansal Wellness Holdings, Inc. and 271 Lake Davis Holdings and its wholly owned subsidiary, Sansal, LLC. All significant inter-company accounts and transactions have been eliminated in consolidation.

 

5 

 

 

SanSal Wellness Holdings, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(Unaudited)

 

  

NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Use of Estimates 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Actual results could differ from these estimates.

 

Fair Value Measurement

The Company has adopted the provisions of ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value as used in numerous accounting pronouncements, establishes a framework for measuring fair value and expands disclosure of fair value measurements.

 

The estimated fair value of certain financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses are carried at historical cost basis, which approximates their fair values because of the short-term nature of these instruments. The carrying amounts of the Company’s short and long-term credit obligations approximate fair value because the effective yields on these obligations, which include contractual interest rates taken together with other features such as concurrent issuances of warrants and/or embedded conversion options, are comparable to rates of returns for instruments of similar credit risk.

 

ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:

 

Level 1 – quoted prices in active markets for identical assets or liabilities

 

Level 2 – quoted prices for similar assets and liabilities in active markets or inputs that are observable

 

Level 3 – inputs that are unobservable (for example cash flow modeling inputs based on assumptions)

 

The Company does not have any assets or liabilities measured at fair value on a recurring basis.

 

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. At times, cash and cash equivalents may be in excess of FDIC insurance limits.

 

Revenue Recognition

In May 2014 the FASB issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes all existing revenue recognition requirements, including most industry specific guidance. This new standard requires a company to recognize revenues when it transfers goods or services to customers in an amount that reflects the consideration that the company expects to receive for those goods or services. The

 

6 

 

 

SanSal Wellness Holdings, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(Unaudited)

 

    

NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Revenue Recognition (Continued)

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).

 

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

 

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

 

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

 

Inventories

Inventories consist of growing and processed plants and oils and are valued at the lower of cost or net realizable value. In evaluating whether inventories are stated at lower of cost or net realizable value, management considers such factors as inventories in hand, estimated time to sell such inventories and current market conditions. Write-offs for inventory obsolescence are recorded when, in the opinion of management, the value of specific inventory items has been impaired.

 

7 

 

 

SanSal Wellness Holdings, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(Unaudited)

 

   

NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Property, Plant and Equipment

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

 

Impairment of Long-Lived Assets

The carrying value of long-lived assets are reviewed when facts and circumstances suggest that the assets may be impaired or that the amortization period may need to be changed. The Company considers internal and external factors relating to each asset, including cash flows, local market developments, industry trends and other publicly available information. If these factors and the projected undiscounted cash flows of the Company over the remaining amortization period indicate that the asset will not be recoverable, the carrying value will be adjusted to the fair market value. The Company has determined that no impairment exists at March 31, 2018 and 2017.

 

Compensation and Benefits

The Company records compensation and benefits expense for all cash and deferred compensation, benefits, and related taxes as earned by its employees. Compensation and benefits expense also includes compensation earned by temporary employees and contractors who perform similar services to those performed by the Company’s employees.

 

Stock-Based Compensation

The Company accounts for share-based payments in accordance with ASC 718, “Compensation - Stock Compensation,” which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on the grant date fair value of the award. In accordance with ASC 718-10-30-9, “Measurement Objective – Fair Value at Grant Date,” the Company estimates the fair value of the award using the Black-Scholes option pricing model for valuation of the share- based payments. The Company believes this model provides the best estimate of fair value due to its ability to incorporate inputs that change over time, such as volatility and interest rates, and to allow for actual exercise behavior of option holders.

 

8 

 

 

SanSal Wellness Holdings, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(Unaudited)

 

  

NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Stock-Based Compensation (Continued)

The simplified method is used to determine compensation expense since historical option exercise experience is limited relative to the number of options issued. The compensation cost is recognized ratably using the straight-line method over the expected vesting period.

 

The Company accounts for stock-based compensation to other than employees in accordance with FASB ASC 505-50. Equity instruments issued to other than employees are valued at the earlier of a commitment date or upon completion of the services, based on the fair value of the equity instruments, and is recognized as expense over the service period.

 

Income Taxes

The Company was a Limited Liability Company (“LLC”) for income tax purposes until September 27, 2017 when the transaction referred to in Note 1 discussed in the “Nature of Business” occurred. In lieu of corporate income taxes, the owners were taxed on their proportionate shares of the Company’s taxable income. Accordingly, no liability for federal or state income taxes and no provision for federal or state income taxes have been included in the financial statements up to that date.

 

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

 

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

 

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

 

9 

 

 

SanSal Wellness Holdings, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(Unaudited)

 

  

NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Related Party Transactions

The Company follows FASB ASC subtopic 850-10, Related Party Disclosures, for the identification of related parties and disclosure of related party transactions. Pursuant to ASC 850-10-20, related parties include: a) affiliates of the Company; b) entities for which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of Section 825–10–15, to be accounted for by the equity method by the investing entity; c) trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management; d) principal owners of the Company; e) management of the Company; f) other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests; and g) other parties that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.

 

The consolidated financial statements shall include disclosures of related party transactions, other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business. However, disclosure of transactions that are eliminated in the preparation of consolidated or combined financial statements is not required in those statements. The disclosures shall include: a) the nature of the relationship(s) involved; b) a description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which statements of operation are presented, and such other information deemed necessary to an understanding of the effects of the transactions on the financial statements; c) the dollar amounts of transactions for each of the periods for which statements of operations are presented and the effects of any change in the method of establishing the terms from that used in the preceding period; and d) amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.

 

New Accounting Pronouncements

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. The amendments in the ASU require entities that measure inventory using the first-in, first-out or average cost methods to measure inventory at the lower of cost and net realizable value. Net realizable value is defined as estimated selling price in the ordinary course of business less reasonably predictable costs of completion, disposal, and transportation. This ASU will be effective for the Company for fiscal years beginning after December 15, 2016. The Company has adopted ASU 2015-11 and it did not have a material effect on its financial statements.

 

10 

 

 

SanSal Wellness Holdings, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(Unaudited)

 

  

NOTE 1: NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

New Accounting Pronouncements (Continued)

In November 2015, the Financial Accounting Standards Board issued Accounting Standards Update 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. This Accounting Standards Update simplifies the presentation of deferred income taxes by eliminating the requirement for entities to separate deferred tax liabilities and assets into current and noncurrent amounts in classified balance sheets. Instead, it requires deferred tax assets and liabilities be classified as noncurrent in the balance sheet. Accounting Standards Update 2015-17 is effective for financial statements issued for annual periods beginning after December 15, 2017. The Company early adopted this standard on a retrospective basis all deferred income tax assets and liabilities have been presented as noncurrent.

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The FASB issued ASU 2016-02 to increase transparency and comparability among Companies by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Certain qualitative and quantitative disclosures are required, as well as a retrospective recognition and measurement of impacted leases. The new guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2018, with early adoption permitted. Management is currently evaluating the standard.

 

Subsequent Events

The Company has evaluated subsequent events through the date which the financial statements were available to be issued.

 

11 

 

 

SanSal Wellness Holdings, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(Unaudited)

 

  

NOTE 2: INVENTORIES

 

Inventory consists of:

 

   March 31,   December 31, 
   2018   2017 
Inventory        
Work In Progress  $1,440,911   $1,370,148 
Finished Goods   30,515    44,802 
Other   13,808    13,808 
           
Inventory  $1,485,234   $1,428,758 

 

During the periods ending March 31, 2018 and December 31, 2017, the Company realized a loss from destruction of plants in the amounts of $0 and $202,920, respectively.

 

NOTE 3: PROPERTY AND EQUIPMENT

 

       March 31,   December 31, 
   Life   2018   2017 
PROPERTY AND EQUIPMENT               
Land and Land Improvements      $398,126   $398,126 
Building and Improvements   39    1,443,182    1,443,182 
Greenhouse   39    693,987    693,987 
Fencing and Irrigation   15    185,895    185,895 
Machinery and Equipment   7    941,702    941,702 
Furniture and Fixtures   7    216,116    216,116 
Computer Equipment   5    20,053    20,053 
Truck   5    16,161    16,161 
Capital Lease Asset - not in service            
        $3,915,222   $3,915,222 
Less Accumulated Depreciation        (369,300)   (306,038)
Property and Equipment       $3,545,922   $3,609,184 

 

Total depreciation expense was $63,292 and $58,180 for the three months ended March 31, 2018 and 2017, respectively.

 

12 

 

 

SanSal Wellness Holdings, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(Unaudited)

 

  

NOTE 4: LONG-TERM DEBT

 

Long-term debt consisted of the following:

 

   March 31,   December 31, 
   2018   2017 
         
Note Payable which requires monthly payments of $1,618 including interest at 6.00% per annum until February 1, 2020 when the balance is due in full.  The note is secured by specific assets of the Company.  $109,725   $112,903 
           
Capital Lease Payable which requires monthly payments of $32,850 until May 2018, when the Company may purchase the equipment for $1. The Company made no payments since August 2016 and is currently in default with the lessor. (See Note 3)   538,254    538,254 
           
    647,979    651,157 
Less Current Portion   (548,078)   (551,191)
Long-Term Debt - net of current portion  $99,901   $99,966 

 

Future principal payments for the next 5 years are as follows for the years ended December 31:

      
2018   $548,078 
2019    13,735 
2020    86,166 
     $647,979 

 

13 

 

 

SanSal Wellness Holdings, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(Unaudited)

 

  

NOTE 5: STOCK-BASED COMPENSATION

 

The Company approved their 2017 Incentive Stock Plan on September 27, 2017 (the "Incentive Plan") which authorizes the Company to grant or issue non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units and other equity awards up to a total of 7.5 million shares. Under the terms of the Incentive Plan, awards may be granted to our employees, directors or consultants. Awards issued under the Incentive Plan vest as determined by the Board of Directors or any of the Committees appointed under the Incentive Plan at the time of grant.

 

The Company's outstanding stock options have a 10-year term. Outstanding non-qualified stock options granted to employees and a consultant vested immediately. Outstanding incentive stock options issued to employees vest over a three-year period. The incentive stock options granted vest based solely upon continued employment ("time-based"). The Company's time-based share awards that vest in their entirety at the end of three-year periods, time-based share awards where 33.3% of the award vests on each of the three anniversary dates.

 

Stock-based compensation expense was as follows: 

 

   Three Months Ended
March 31:
 
   2018   2017 
Non-Qualified Stock Options - Immediate  $50,564   $ 
Incentive Stock Options - Time Bases        
Total Stock-based Copensation Expense  $50,564   $ 

   

Stock option activity was as follows in the periods ended March 31, 2018 and December 31, 2017:

 

   Stock
Options
   Weighted-
Average
Exercise
   Weighted-
Average
Remaining
 
Outstanding at Decmber 31, 2017   533,336   0.50   10 Years  
Granted           
Exercised              
Forfeited/Canceled   (25,000)   $ 0.50      
Outstanding at March 31, 2018   508,336   $0.50   9.5 Years  
                
Vested at March 31, 2018   425,001   $0.50   9.5 Years  
Exercisable at March 31, 2018   425,001   $0.50   9.5 Years  

 

14 

 

  

SanSal Wellness Holdings, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(Unaudited)

 

  

NOTE 5: STOCK BASED COMPENSATION (CONTINUED)

 

The Company estimated the fair value of each stock option on the date of grant using the Black Scholes valuation model with the following assumptions:

 

Valuation Assumptions  
Risk-free interest rate 2.14% – 2.31%
Expected dividend yield 0%
Expected stock price volatility 105%
Expected life of stock options (in years) 10

  

NOTE 6: OPERATING LEASES

 

On January 15, 2017, the Company entered an agreement with Pueblo, CO Board of Water Works to lease water for the Company’s cultivation process. The agreement went into effect as of November 1, 2016 with a term of 10 years expiring on October 31, 2026, with an option to extend the lease upon expiration for 10 additional years. This agreement replaced previously entered agreements with Pueblo, CO Board of Water Works. The lease requires annual non-refundable minimum service fees of $15,000 and a usage charge of $1,063 per acre for 30 acres. The minimum service fees and usage charges are subject to escalators for each year based upon percentage increases of Pueblo, CO Board of Water Works rates from the previous calendar year. Total water lease expense was $11,724 for the three months ended March 31, 2018 and 2017, respectively.

 

As of March 31, 2018 and December 31, 2017, operating leases have no minimum rental commitments.

 

NOTE 7: COMMON STOCK

 

Effective September 27, 2017, the Company acquired 100% of the issued and outstanding limited liability company membership interests of 271 Lake Davis Holdings LLC dba SanSal Wellness (“271 Lake Davis”) in exchange for 46,800,000 (7,800,000 pre-split) restricted shares of the Company’s common stock.

 

On November 9, 2017, Financial Industry Regulatory Authority authorized a 6-for-1 forward split of the Company’s issued and outstanding shares of common stock in the form of a stock dividend. Accordingly, stockholders of the Company as of the record date of November 9, 2017 received five additional shares of common stock for each share then held. All relevant information relating to number of shares and per share information have been retrospectively adjusted to reflect the split for all periods presented.

 

In January 2018, the Company issued 84,000 shares of common stock for proceeds of $42,000.

 

In January 2018, the Company issued 50,000 shares of common stock for marketing services, valued at $20,500.

 

15 

 

  

SanSal Wellness Holdings, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(Unaudited)

 

  

NOTE 7: COMMON STOCK (CONTINUED)

 

In February 2018, the Company issued 120,000 shares of common stock for proceeds of $30,000.

 

In March 2018, the Company issued 20,000 shares of common stock for proceeds of $10,000.

 

NOTE 8: INCOME TAX

 

The reconciliation of income tax computed at the Federal statutory rate to the provision for income taxes from continuing operations is as follows:

 

   Three Months Ended: 
   March 31,   March 31, 
   2018   2017 
Federal Taxes (credits) at statutory rates  $(124,000)  $(144,000)
Permanent differences        
State and local taxes, net of Federal benefit  $(16,000)  $(19,000)
Change in valuation allowance   140,000    163,000 
   $   $ 

 

Components of deferred tax assets are as follows:  March 31,   December 31, 
   2018   2017 
Deferred Tax Assets;          
Net Operating Loss Carryforwards  $483,000   $397,000 
Total Deferred Tax Assets   483,000    397,000 
Valuation Allowance   (253,000)   (162,000)
           
Total Deferred Tax Assets net of Valuation Allowance  $230,000   $235,000 
Deferred Tax Liabilities;        
Depreciation and Amortization   230,000    235,000 
Total Deferred Tax Liabilities   230,000    235,000 
           
Net Deferred Tax Assets  $   $ 

 

The Company has approximately $1,683,000 net operating loss carryforwards that are available to reduce future taxable income. Those NOLs begin to expire in 2038. In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based on the assessment, management has established a full valuation allowance against all of the deferred tax assets for every period because it is more likely than not that all of the deferred tax assets will not be realized.

 

The Company’s deferred tax liability associated with timing differences related to depreciation and amortization includes $202,000 of liability resulting from tax depreciation deducted in excess of GAAP depreciation prior to the Company becoming taxed as a C-Corporation.

 

16 

 

 

SanSal Wellness Holdings, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(Unaudited)

 

 

NOTE 8: INCOME TAX (CONTINUED)

 

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”) was signed into law, making significant changes to the Internal Revenue Code. Changes include, but are not limited to, a federal corporate tax rate decrease from 35% to 21% for tax years beginning after December 31, 2017, the transition of U.S. international taxation from a worldwide tax system to a territorial system and a one-time transition tax on the mandatory deemed repatriation of foreign earnings. The Company has estimated its provision for income taxes in accordance with the 2017 Tax Act and the guidance available as of the date of March 30, 2018, but has kept the full valuation allowance. As a result, the Company has recorded no income tax expense in the fourth quarter of 2017, the period in which the 2017 Tax Act was enacted. 

 

On December 22, 2017, the Securities and Exchange Commission published Staff Accounting Bulletin No. 118 (“SAB 118”), which addressed the application of GAAP in situations where the Company does not have the necessary information (including computations) available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the 2017 Tax Act. The deferred tax expense to be recorded in connection with the remeasurement of deferred tax assets is to be a provisional amount and a reasonable estimate at December 31, 2017, based upon the best information currently available. The ultimate result may differ from these provisional amounts, possibly materially, due to, among other things, additional analysis, changes in the interpretations and assumptions that the Company has made, additional regulatory guidance that may be issued, and actions that the Company may take as a result of the 2017 Tax Act. Any subsequent adjustment to these amounts will be recorded in current tax expense in the quarter of 2018 when the analysis is complete. The accounting is expected to be complete when the Company’s 2017 federal corporate income tax return is filed in 2018.

 

The Company files income tax returns in the U.S. federal jurisdiction, and the state of Colorado.

 

The Company adopted the provisions of FASB ASC 740, Accounting for Uncertainty in Income Taxes. Management evaluated the Company’s tax positions and concluded that the Company had taken no uncertain tax positions that require adjustment to the financial statements to comply with the provisions of this guidance. The Company has no significant adjustments as a result of the implementation of FASB ASC 740.

 

NOTE 9: CONCENTRATIONS

 

The Company had three customers in the three months ending March 31, 2018 accounting for 57%, 20%, and 10% of total sales. For the three months ending March 31, 2017, three customers accounted for 35%, 24%, and 15% of sales.

 

The Company had three customers in the three months ended March 31, 2018 accounting for 35%, 24%, and 15% or accounts receivable. For the three months ended March 31, 2017, one customer accounted for 79% of accounts receivable.

 

17 

 

 

SanSal Wellness Holdings, Inc. and Subsidiary

Notes to Consolidated Financial Statements

(Unaudited)

 

 

NOTE 10: GOING CONCERN

 

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States, which contemplate continuation of the Company as a going concern. However, the Company has sustained substantial losses from operations since its inception. As of and for the period ended March 31, 2018, the Company had an accumulated deficit of $4,294,312, a net loss of $203,295, and a working capital deficit of $410,915. These factors, among others, raise substantial doubt about the ability of the Company to continue as a going concern. Continuation as a going concern is dependent on the ability to raise additional capital and financing, though there is no assurance of success.

 

The Company is currently in the final stages of launching a new rebranded line of hemp oil and extract products as part of the Company’s increased focus on sales and marketing. The rebranded product line, including new trade name and packaging, is being developed to expand the company’s potential customer base. The newly branded products are expected to be available to consumers, retailers, and distributors in the second quarter of 2018, and will include vegan capsules, tinctures, lotions, salves, and oral syringes in various potency levels and flavors.

 

Currently, the Company incorporates an aggressive marketing plan to compete in the Cannabinoid industry. To become market leaders in the market, the Company will use three primary departments to market its products including: web-based marketing, traditional marketing, and medical marketing departments.

 

NOTE 11: RELATED PARTY

 

The Company incurred $39,200 and $0 of legal expenses during the three months ended March 31, 2018 and 2017, respectively for legal services. As of March 31, 2018 and December 31, 2017, the Company had related party legal accruals for $132,420 and $93,220, respectively.

 

The Company entered into various note payables with stockholders of the company between March 2017 and March 2018. The notes bear interest between 2.00% and 3.00% per annum. Principal and interest are payable in one installment due July 31, 2018. The principal balance due on these notes was $1,059,289 and $1,030,080 for the periods ending March 31, 2018 and December 31, 2017. Interest accrued was $22,616 and $16,230 for the periods ending March 31, 2018 and December 31, 2017, respectively.

 

The Company issued stock incentives to various directors and employees. Refer to Note 5 for additional details.

  

18 

 

 

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

 

Unless the context otherwise requires, references in this report to “the Company,” “SanSal Wellness,” “we,” “us” and “our” refer to SanSal Wellness Holdings, Inc. and its subsidiary. All share and per share information in this report gives pro forma effect to the implementation of a six for one forward stock split effective November 9, 2017.

 

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

 

SanSal Wellness is an entirely vertically-integrated agribusiness focused on producing highest purity full spectrum natural phytocannabinoid-rich industrial hemp products. SanSal Wellness owns and operates a 140-acre farm in Pueblo, Colorado, capable of producing over 200,000 proprietary full spectrum phytocannabinoid-rich hemp plants yielding a potential minimum annual harvest of over 200,000 pounds of outdoor-grown industrial hemp. While part of the cannabis family, industrial 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 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 industrial hemp, oil extraction, formulation laboratories, and quality/purity testing. SanSal Wellness is registered with the Colorado Department of Agriculture to grow industrial hemp pursuant to federal law.

 

SanSal Wellness 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. Most commercially available hemp oil and extracts are not derived from the entire plant and are usually from less desired hemp seed which contain fewer cannabinoids. As a result, SanSal Wellness believes that its products are premier quality cannabinoids and are highly sought after by consumers and manufacturers of premium hemp products.

 

SanSal Wellness has developed a wide variety of formulated phytocannabinoid-rich hemp products 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.

 

SanSal Wellness products (20+ SKUs) include vegan capsules, 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 direct from SanSal Wellness and through numerous online and retail outlets.

 

19 

 

 

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.

 

Our executive offices are located at 6610 North University Drive #220, Fort Lauderdale, FL 33321 and our telephone number is (954) 722-1300. Our corporate website is www.sansalwellness.com. Information appearing on our corporate website is not part of this report.

 

Corporate History

 

The Company’s original business objective following its March 15, 2011 incorporation in Nevada, was to produce and market its own brand of ice wine made from grapes harvested in Armenia. While the Company took numerous steps with respect to implementation of its business plan, including securing sources of production and did, in fact produce 4,500 bottles of ice wine for product sampling and customer marketing purposes, the Company was unable to raise sufficient capital to fully implement its business plan and generate revenues.

 

On June 5, 2017, Mr. Jaitegh Singh purchased a total of 45,000,000 “restricted” shares of our Company’s common stock from our then sole officer and director, Cassandra Tavukciyan, for aggregate consideration of $345,000. The share purchase was consummated in a private transaction pursuant to a common stock purchase agreement entered into between Mr. Singh and Ms. Tavukciyan.

 

Concurrent with the share purchase transaction, Cassandra Tavukciyan resigned as our Chief Executive Officer, Chief Financial Officer and sole director, and was succeeded in those capacities by Jaitegh Singh. Mr. Singh relocated the Company’s principal offices to Fort Lauderdale, Florida.

 

On September 27, 2017 (“Closing”), the Company entered into a Securities Exchange Agreement (the “Exchange Agreement”) with all the members (the “Members”) of 271 Lake Davis Holdings, LLC d/b/a SanSal Wellness (“271”), pursuant to which it became a wholly-owned subsidiary of the Company (the “SanSal Acquisition”). 271, founded in 2015, is a vertically-integrated agribusiness focused on producing full spectrum natural phytocannabinoid-rich industrial hemp extracts.

 

Pursuant to the Exchange Agreement, we acquired all the outstanding limited liability company interests of 271 in exchange for the issuance to the Members, pro rata, of 46,800,000 “restricted” shares of our common stock, whereupon Jaitegh Singh, the holder of the Company’s currently outstanding 45,000,000 “restricted” shares of common stock contributed those shares to the capital of the Company for cancellation.

 

At Closing, Alexander M. Salgado and Erduis Sanabria, the members of 271’s management team, were appointed to the Company’s board of directors and as the Company’s Chief Executive Officer and Executive Vice President, respectively. Jaitegh Singh, who was then the Company’s President and sole director, then stepped down from such position, but assumed the position of the Company’s Vice President and Secretary.

 

In addition, at Closing, Members, holding an aggregate of 26,674,500 shares of our common stock, including Messrs. Salgado and Sanabria, entered into a five-year voting agreement, pursuant to which Messrs. Salgado and Erduis have the right to direct the voting of their shares on all matter presented to shareholders for a vote.

 

Following completion of the SanSal Acquisition, the Company determined to focus its business on the business of 271. Accordingly, we applied to FINRA to (a) change our corporate name from “Armeau Brands Inc.” to “SanSal Wellness Holdings, Inc.” (with a comparable change in our trading symbol from ARUU to SSWH); (b) authorize a class of “blank check” preferred stock; and (c) implement a six-for-one forward stock split. The name, trading symbol and authorized capitalization changes became effective as of November 7, 2017 and the stock split was implemented on November 9, 2017.

 

As a result of the completion of the SanSal Acquisition and management’s determination to focus the Company’s future business efforts on the SanSal Wellness business, 271 (SanSal Wellness) is deemed to be the survivor of the SanSal Acquisition for financial statement purposes. Moreover, we changed the Company’s fiscal year-end from January 31 to December 31 to coincide with 271’s fiscal year-end, effective with the fiscal year ended December 31, 2017.

 

20 

 

 

Results of Operations

 

Three months ended March 31, 2018 compared to three months ended March 31, 2017

 

Revenues. We had net sales for the three months ended March 31, 2018 of $331,416, as compared to $264,450 for the three months ended March 31, 2017, giving effect to the ramp up of commercial production and sale of SanSal Wellness’ hemp extract products in 2018, as opposed to the commencement of marketing having taken place in the 2017 quarter. 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 product lines. The majority of sales come from one customer, which may pose a business risk.

 

Cost of Sales: All expenses incurred to grow, process, and package the finished goods are included in our cost of sales. In the 2017 quarter the Company experienced large plant losses due to weather and unnatural circumstances, resulting in higher costs of raw material. Reflecting the foregoing, cost of sales was $198,003 for the three months ended March 31, 2018, as compared to $131,190 in the comparable quarter in 2017, which resulted in gross profit of $133,413 for the three months ended March 31, 2018, as compared to $133,260 for the three months ended March 31, 2017.

 

Expenses. Selling, general and administrative expenses increased slightly to $500,945 for the three months ended March 31, 2018, from $373,414 for the three months ended March 31, 2017. General and administrative expenses consist primarily of administrative personnel costs, facilities expenses, and professional fee expenses.

 

Interest expense for the three months ended March 31, 2018 was $9,690, reflecting increased outstanding debt, $6,387 of which was attributable to loans from principal shareholders, as compared to $8,205 for the three months ended March 31, 2017, none of which was attributable to loans from principal shareholders.

 

Merger expenses relating to the reverse merger of $163,403 were incurred during the three months ended March 31, 2017 compared to $0 in 2018. Other income was recognized in 2018 relating to accounts payable that were released.

 

As a result of the decrease in operating and other expenses incurred during the three months ended March 31, 2018, offset partially by lower gross margin, net loss for the three months ended March 31, 2018, decreased to $(353,295) or $(0.01) per share based on 60,060,978 weighted average shares outstanding from $(411,762) or $(0.01) per share for the three months ended March 31, 2017, based on 58,500,000 weighted average shares outstanding.

 

Liquidity and Capital Resources

 

As of March 31, 2018, total assets were $5,170,412, as compared to $5,210,740 at December 31, 2017. Assets remained consistent due to similar inventory quantities and no new capital asset additions.

 

Total current liabilities as of March 31, 2018 were $2,162,405, as compared to $2,002,487 at December 31, 2017, remaining consistent between periods as only minimal new debt was obtained.

 

Net cash used in operating activities was $135,934 for the three months ended March 31, 2018, as compared to $493,217 for the same period in 2017 as the result of stabilized inventory levels in 2018.

 

Net cash used in investing activities declined to $0 for the three months ended March 31, 2018, from $192,863 for the three months ended March 31, 2017, reflecting a significant decrease in cash used for the purchase of property and equipment from the 2017 quarter to the 2018 quarter.

 

21 

 

 

Net cash provided by financing activities was $108,131 for the three months ended March 31, 2018, as compared to $1,131,929 for the three months ended March 31, 2017, reflecting a decrease in capital contributions from shareholders.

 

Our primary sources of capital to develop and implement our business plan have been the proceeds from private offerings of our equity securities of $82,050 of cash during the three months ended March 31, 2018, capital contributions made by Members prior to completion of the SanSal Acquisition ($1,161,350 during the three months ended March 31, 2017) and $1,059,289 in principal amount of loans from shareholders, including Erduis Sanabria, our Executive Vice President and a director, The shareholder loans are evidenced by promissory notes issued to the lending shareholders, which accrue interest rates between 2% and 3% per annum and are payable, together with the principal amount of the Shareholder Notes at maturity, which is currently July 31, 2018. There were also distributions to Members of $26,428 during the three months ended March 31, 2017.

 

The Company believes that it will require additional financing to achieve profitability. The Company intends to seek such financing through additional private offerings of its common stock. The Company does not intend to accept any further loans from shareholders. Further, our independent auditors report for the year ended December 31, 2017 includes an explanatory paragraph strategy that our lack of revenues and working capital raise substantial doubt about our ability to continue as a going concern. While we believe additional financing will be available to us, 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). 


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.

 

22 

 

 

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, 2017 and 2016.

 

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.

 

Item 3. Quantitative Disclosures About Market Risks.

 

As a “smaller reporting company,” we are not required to provide the information required by this Item.

 

Item 4. Controls and Procedures.

 

Management’s Report on Disclosure Controls and Procedures

 

Our Chief Executive Officer (our principal executive, financial and accounting officer), conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), as amended, as of March 31, 2018, to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms adopted by the Securities and Exchange Commission (the “SEC”), including to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer (our principal executive, financial and accounting officer), or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, our Chief Executive Officer (our principal executive, financial and accounting officer) has concluded that as of March 31, 2018, our disclosure controls and procedures were not effective at the reasonable assurance level in that:

 

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(a) We do not have written documentation of our internal control policies and procedures. Written documentation of key internal controls over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act. Our Chief Executive Officer (our principal executive, financial and accounting officer) evaluated the impact of our failure to have written documentation of our internal controls and procedures on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.

 

(b) We do not have sufficient segregation of duties within accounting functions, which is a basic internal control. Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals. Our Chief Executive Officer (our principal executive, financial and accounting officer) evaluated the impact of our failure to have segregation of duties on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.

 

To address these material weaknesses, our Chief Executive Officer (our principal executive, financial and accounting officer) performed additional analyses and other procedures to ensure that the consolidated financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented. Accordingly, we believe that the consolidated financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented

 

Our Chief Executive Officer (our principal executive, financial and accounting officer) does not expect that our disclosure controls or internal controls will prevent all error and all fraud. Although our disclosure controls and procedures were designed to provide reasonable assurance of achieving their objectives and our principal executive officer has determined that our disclosure controls and procedures are effective at doing so, a control system, no matter how well conceived and operated, can provide only reasonable, not absolute assurance that the objectives of the system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented if there exists in an individual a desire to do so. There can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

 

Changes in Internal Controls Over Financial Reporting

 

There were no changes in our internal controls over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

We know of no material, existing or pending legal proceedings against our company, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our interest.

 

Item 1A. Risk Factors.

 

As a “smaller reporting company,” we are not required to provide the information required by this Item.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

In addition to unregistered sales of equity securities reported in Item 5 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, during the three months ended March 31, 2018, the Company:

 

●        sold an aggregate of 180,000 shares at a price of $0.50 per share to a single “accredited” investor in a private transaction.  

 

●        sold an aggregate of 120,000 shares at a price of $0.25 per share to a single “accredited” investor in a private transaction.  

 

All of the foregoing shares were offered and sold pursuant to the exemptions from registration afforded by Section 4(a)(2) of the Securities Act of 1933, as amended and Regulation D promulgated thereunder. 

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

None.

 

Item 6. Exhibits.

 

Exhibit
Number
  Description of Exhibit
     
31.1   Section 302 Certification
32.1   Section 906 Certification

 

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SIGNATURES

 

 

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.

 

  SANSAL WELLNESS HOLDINGS, INC.
   
Dated: May 22, 2018 By: /s/ Alexander M. Salgado
    Alexander M. Salgado, Chief Executive Officer
    (Principal Executive, Financial and Accounting Officer)

 

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