Healthcare Solutions Management Group, Inc. - Quarter Report: 2014 March (Form 10-Q)

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: March 31, 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)

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 [X] No [  ]

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.

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 May 23, 2014, the registrant had 9,177,201 shares of its common stock outstanding.

VERITY CORP.

FOR THE QUARTER ENDED

MARCH 31, 2014

TABLE OF CONTENTS

Part I - Financial Information

Item 1 - Financial Statements

VERITY CORP.

AND ITS SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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 SIX MONTHS ENDED MARCH 31, 2014 and 2013 (Unaudited)

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

VERITY CORP.

AND ITS SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED MARCH 31, 2014 AND 2013 (UNAUDITED)

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

VERITY CORP AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

AS OF MARCH 31, 2014

NOTE 1 – ORGANIZATION AND BUSINESS BACK GROUND

OVERVIEW

Verity Corp. (the “Company”) is a natural-oriented, technologically sophisticated Agribusiness Services company. The Company’s Corporate Goal is to provide consumers with safe, high-quality and nutritious food sources and high-quality water for drinking and for agricultural and livestock production. The Company has a portfolio of proprietary natural (oriented) products and services focused from Soil to Plate to fulfill its Corporate Goal.

HISTORY AND PRODUCT OVERVIEW

Verity’s predecessor company Verity Farms, LLC was incorporated in July 2004. Since then the Company has taken its sustainable crop and livestock production protocols and developed:

These products and programs position Verity as a leader & one-stop farming & food production resource addressing powerful & accelerating trends that are altering production methods in the $53 billion Food Market.

ORGANIZATION & OPERATIONS

The Company is organized into 3 divisions: Verity Agriculture Productions & Soil Preservation; Verity Water Systems; and Verity Consumer Products. These distinct divisions are interlinked by one sales team, located in major agricultural production markets, to provide: farmers, ranchers, food distributors & processors and food manufacturers and grocery retailers a wide spectrum of product & service solutions to address their issues in production, supply, and market positioning. Verity has integrated operations at its Corporate Headquarters, in Sioux Falls, South Dakota and in Pelham Georgia, which provides Product Distribution, Sales, and Crop Advisory Services in Georgia for the Southeast U.S. In order to focus the Company’s limited resources, Verity’s Consumer products remains in test / pre-production mode. The Company’s Agriculture Production & Soil Preservation Division and Water Systems Division are moving from a limited “Bottom Up” Sales mode to Mass Commercialization through the establishment of strategic relationships .

STRATEGY

Verity changed its top management and corporate organization in Q1 FY2014. This change is accompanied by a change in focus and allocation of resources that had gained momentum in preceding years.. The new CEO has led Verity Sales & Product R&D since 2011. The prior CEO has retired from day-to-day operational responsibilities, is an advisor and consultant to the Company, and remains a member of Verity’s Board of Directors.

From FY 2004 through FY 2013, Verity focused on:

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 of the Top Down Strategy is expected to result in meaningful increases in FY2014 revenue.. Part B of the Top Down Strategy is expected to result in customer and business partnership relationships that will strategically expand Verity’s network of business relationships and sales of the full line of Verity Products and Services. Part B is expected to result in a meaningful increase in revenue in the intermediate term of FY2014 & FY2015.

COMPETITION

Verity Corp. operates in environments of heavy competition. However, the Company’s Products & Services have competitive advantages that can propel their growth with proper resources and effective management. Obtaining a small fraction of market share will provide Verity with substantial growth opportunities

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP) under the accrual basis of accounting.

Use of Estimates

In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management makes estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. These accounts and estimates include, but are not limited to, the valuation of accounts receivables, inventories, prepaid expenses, other receivables, investment in partnership, liabilities and the estimation on useful lives of property, and plant and equipment. Actual results could differ from these estimates.

Basis of Consolidation

The consolidated financial statements include the financial statements of the Company and its subsidiaries.

All significant inter-company balances and transactions within the Company and subsidiaries have been eliminated upon consolidation.

Cash and Cash Equivalents

Cash and cash equivalents are carried at cost and represent cash on hand, demand deposits placed with banks or other financial institutions and all highly liquid investments with an original maturity of three months or less as of the purchase date of such investments.

Accounts Receivable

Accounts receivable are recorded at the invoiced amount and do not bear interest. The Company extends unsecured credit to its customers in the ordinary course of business but mitigates the associated risks by actively pursuing past due accounts. An allowance for doubtful accounts is established and determined based on managements’ assessment of the accounts receivables collectibles. Judgment is required in assessing the amount of the allowance. The Company considers the historical level of credit losses and applies percentages to different receivables categories. The Company makes judgments about the creditworthiness of each customer based on ongoing credit evaluations, and monitors current economic trends that might impact the level of credit losses in the future. If the financial condition of the customers were to deteriorate, resulting in their inability to make payments, a larger allowance may be required.

Accounts Receivable (cont.)

Based on the above assessment, during the reporting periods, management establishes the general provisioning policy to make an allowance equivalent to approximately 5% of the gross amount of accounts receivables. Additional specific provision is made against accounts receivables to the extent which they are considered to be doubtful.

Historically, losses from uncollectible accounts have not significantly deviated from the general allowance estimated by management and no significant additional bad debts have been written off directly to net income. There were no changes in the general provisioning policy in the past since establishment and management considers that the aforementioned general provisioning policy is adequate, not excessive and does not expect to change this established policy in the near future. As of December 31, 2013 and September 30, 2013, the Company recorded an allowance for uncollectible accounts in the amounts of $8,584 and $8,584, respectively.

Inventories

Inventories consist of raw materials and finished goods and goods available for resale, which are valued at lower of cost or market value, cost being determined on the first-in, first-out method. The Company periodically reviews historical sales activity to determine excess, slow moving items and potentially obsolete items and also evaluates the impact of any anticipated changes in future demand. The Company provides inventory allowances based on excess and obsolete inventories determined principally by customer demand, which was approximately 5% of ending inventories at the reporting periods. The spoilage will be written-off directly to the profit and loss when it occurs. As of March 31, 2014 and September 30, 2013, the Company recorded an allowance for obsolete inventories in the amounts of $36,241 and $33,630, respectively.

Fixed Assets, Net

Fixed assets are stated at cost less accumulated depreciation and accumulated impairment losses, if any. Depreciation is calculated on the straight-line basis over the following expected useful lives from the date on which they become fully operational. There are no estimated residual values taken into account.

Expenditures for maintenance and repairs that do not make the fixed asset more useful or prolong its useful life are expensed as incurred.

Impairment of Long Lived Assets

The Company evaluated the recoverability of its property, plant, equipment, and other long-lived assets in accordance with FASB Accounting Standards Codification Topic 360, “Property, Plant and Equipment” (“ASC 360”), which requires recognition of impairment of long-lived assets in the event the net book value of such assets exceed the estimated future undiscounted cash flows attributable to such assets or the business to which such intangible assets relate. The Company evaluated the recoverability of the fixed assets and did not recognize any impairment during the three months ended December 31, 2013.

Fair Value for Financial Assets and Financial Liabilities

The Company follows paragraph 825-10-50-10 of the FASB Accounting Standards Codification (“ASC”) for disclosures about fair value of its financial instruments and paragraph 820-10-35-37 of the FASB ASC (“Paragraph 820-10-35-37”) to measure the fair value of its financial instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value in U.S. GAAP, and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three levels of fair value hierarchy defined by Paragraph 820-10-35-37 are described below:

The carrying amounts of the Company’s financial assets and liabilities, such as cash and accounts payable approximate their fair values because of the short maturity of these instruments.

The Company does not have any assets or liabilities measured at fair value on a recurring or a non-recurring basis, consequently, the Company did not have any fair value adjustments for assets and liabilities measured at fair value at December 31, 2013 and September 30, 2013 nor gains or losses are reported in the statement of operations that are attributable to the change in unrealized gains or losses relating to those assets and liabilities still held at the reporting date for the for the three months ended December 31, 2013.

Revenue Recognition

The Company derives revenues from the sale of agricultural products, animal feeds, consulting services, and various water units. In accordance with guidance by paragraph 605-10-S99-1 of the FASB ASC for revenue recognition, the Company recognizes revenue when persuasive evidence of an arrangement exists, transfer of title has occurred or services have been rendered, the selling price is fixed or determinable and collectability is reasonably assured. The Company’s sales arrangements are not subject to warranty.

Cost of Goods Sold

Cost of goods sold consists primarily of material costs which are directly attributable to the manufacture of products, to the products held for resale and to the provision of services.

Income Taxes

The Company adopts the ASC Topic 740, “Income Taxes ” regarding accounting for uncertainty in income taxes which prescribes the recognition threshold and measurement attributes for financial statement recognition and measurement of tax positions taken or expected to be taken on a tax return. In addition, the guidance requires the determination of whether the benefits of tax positions will be more likely than not sustained upon audit based upon the technical merits of the tax position. For tax positions that are determined to be more likely than not sustained upon audit, a company recognizes the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement in the financial statements. For tax positions that are not determined to be more likely than not sustained upon audit, a company does not recognize any portion of the benefit in the financial statements. The guidance provides for de-recognition, classification, penalties and interest, accounting in interim periods and disclosure. For the three months ended December 31, 2013 and 2012, the Company did not have any interest and penalties associated with tax positions. As of December 31, 2013 and September 30, 2013, the Company did not have any significant unrecognized uncertain tax positions.

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statement of income in the period that includes the enactment date. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain.

Uncertain Tax Positions

The Company did not take any uncertain tax positions and had no adjustments to unrecognized income tax liabilities or benefits pursuant to the provisions of Section 740-10-25 for the three months ended December 31, 2013.

Comprehensive income

The Company adopted FASB Accounting Standards Codification 220 “Comprehensive Income” (ASC “220”) which establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income as defined includes all changes in equity during the year from non-owner sources. There are no items of comprehensive income (loss) applicable to the Company during the years covered in the consolidated financial statements.

Off-balance sheet arrangements

The Company does not have any off-balance sheet arrangements.

Related Parties

The Company follows subtopic 850-10 of the FASB Accounting Standards Codification for the identification of related parties and disclosure of related party transactions.

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

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

Commitments and Contingencies

The Company follows subtopic 450-20 of the FASB Accounting Standards Codification to report accounting for contingencies. Certain conditions may exist as of the date the consolidated financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s financial statements. If the assessment indicates that a potentially material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed.

Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed. Management does not believe, based upon information available at this time that these matters will have a material adverse effect on the Company’s consolidated financial position, consolidated results of operations or consolidated cash flows. However, there is no assurance that such matters will not materially and adversely affect the Company’s business, consolidated financial position, and consolidated results of operations or consolidated cash flows.

Subsequent Events

The Company adopted FASB Accounting Standards Codification 855 “Subsequent Events” (“ASC 855”) to establish general standards of accounting for and disclosure of events that occur after the balance sheet date, but before the financial statements are issued or available to be issued.

Recently issued accounting standards

The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements may be expected to cause a material impact on its consolidated financial condition or the consolidated results of its operations.

In May 2011, FASB issued Accounting Standards Update No. 2011-04, “Fair Value Measurements (ASC 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“ASU 2011-04”). ASU 2011-04 changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements to ensure consistency between U.S. GAAP and IFRS. ASU 2011-04 also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. This new guidance is to be applied prospectively. The Company anticipates that the adoption of this standard will not materially expand its financial statement note disclosures.

In June 2011, FASB issued ASU No. 2011-05, “Comprehensive Income (ASC 220): Presentation of Comprehensive Income” (“ASU 2011-05”), which amends current comprehensive income guidance. This accounting update eliminates the option to present the components of other comprehensive income as part of the statement of shareholders’ equity. Instead, the Company must report comprehensive income in either a single continuous statement of comprehensive income which contains two sections, net income and other comprehensive income, or in two separate but consecutive statements. ASU 2011-05 will be effective for public companies during the interim and annual periods beginning after December 15, 2011, with early adoption permitted. The Company is reviewing ASU 2011-05 to ascertain its impact on the Company’s consolidated financial position, results of operations or cash flows as it only requires a change in the format of the current presentation.

In September 2011, the FASB issued ASU 2011-08, “Testing Goodwill for Impairment”, which allows, but does not require, an entity when performing its annual goodwill impairment test the option to first do an initial assessment of qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount for purposes of determining whether it is even necessary to perform the first step of the two-step goodwill impairment test. Accordingly, based on the option created in ASU 2011-08, the calculation of a reporting unit’s fair value is not required unless, as a result of the qualitative assessment, it is more likely than not that fair value of the reporting unit is less than its carrying amount. If it is less, the quantitative impairment test is then required. ASU 2011-08 also provides for new qualitative indicators to replace those currently used. Prior to ASU 2011-08, entities were required to test goodwill for impairment on at least an annual basis, by first comparing the fair value of a reporting unit with its carrying amount. If the fair value of a reporting unit is less than its carrying amount, then the second step of the test is performed to measure the amount of impairment loss, if any. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. The Company adopted ASU 2011-08 during the first quarter of fiscal 2013. The adoption of ASU 2011-08 did not impact the Company’s results of operations or financial condition.

In December 2011, FASB issued Accounting Standards Update 2011-11, “Balance Sheet - Disclosures about Offsetting Assets and Liabilities” to enhance disclosure requirements relating to the offsetting of assets and liabilities on an entity’s balance sheet. The update requires enhanced disclosures regarding assets and liabilities that are presented net or gross in the statement of financial position when the right of offset exists, or that are subject to an enforceable master netting arrangement. The new disclosure requirements relating to this update are retrospective and effective for annual and interim periods beginning on or after January 1, 2013. The update only requires additional disclosures, as such, the Company does not expect that the adoption of this standard will have a material impact on its consolidated results of operations, cash flows or financial condition.

In July 2012, the FASB issued ASU No. 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment”. The guidance allows companies to perform a “qualitative” assessment to determine whether further impairment testing of indefinite-lived intangible assets is necessary, similar in approach to the goodwill impairment test.

ASU 2012-02 allows companies the option to first assess qualitatively whether it is more likely than not that an indefinite-lived intangible asset is impaired, before determining whether it is necessary to perform the quantitative impairment test. An entity is not required to calculate the fair value of an indefinite-lived intangible asset and perform the quantitative impairment test unless the entity determines that it is more likely than not that the asset is impaired. Companies can choose to perform the qualitative assessment on none, some, or all of its indefinite-lived intangible assets or choose to only perform the quantitative impairment test for any indefinite-lived intangible in any period.

ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. The Company is in the process of evaluating the guidance and the impact ASU 2012-02 will have on its consolidated financial statements.

The accompanying financial statements have been prepared by the Company in accordance with Article 8 of U.S. Securities and Exchange Commission’s (the “SEC”) Regulation S-X. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations, and cash flows at September 30, 2013 and 2012 and for the periods then ended have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted. It is suggested that these condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s December 31, 2013 financial statements.

NOTE 3 – GOING CONCERN

The Company’s financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. At March 31, 2014, the Company had a retained deficit of $11,505,927 and current liabilities in excess of current assets by $4,973,725. During the six months ended March 31, 2014, the Company incurred a net loss of $674,016 and incurred negative cash flows from operations of $429,594. These factors create an uncertainty about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

The Company’s continuation as a going concern is dependent upon its ability to increase revenues, decrease or contain costs and achieve profitable operations. In this regard, Company’s management is focused on the development and expansion of the Company’s technology, including water filtration and purification, bio-information and life sciences, the deployment of its technology platform in the agricultural medical fields, and the licensing of patents, as well as exploring strategic acquisitions in the technology field. Should the Company’s financial resources prove inadequate to meet the Company’s needs before additional revenue sources can be realized, the Company may raise additional funds through loans or through sales of common or preferred stock. There is no assurance that the Company will be successful in achieving profitable operations or in raising any additional capital.

NOTE 4 – RELATED PARTY TRANSACTIONS

Note payable- related party: At March 31, 2014, the Company had a note payable due to our Board Member in the amount of $341,267 which is secured by the Company’s ownership in Aistiva Corporation, carries accrued interest of 6% and is due on December 28, 2013, the interest accrued but not paid as of March 31, 2014 is $24,998. A second note payable to our Board Member in the amount of $3,220,000 is unsecured, carries an interest rate of 3% and is due on demand. The interest accrued, but not paid as of March 31, 2014 is $133,446. A third note payable to our Board Member in the amount of $150,000, is unsecured, carries an interest rate of 5% and is due on demand. The interest accrued but not paid as of March 31, 2014 is $18,154. A fourth note payable to our Board Member in the amount of $340,000, is unsecured, carries an interest rate of 3% and is due on demand. The interest accrued but not paid as of March 31, 2014 is $26,086.

Real estate loan- related party: In December 2012, the Company issued a note payable in the amount of $2,400,000 to a company under the control of our Board Member to acquire land. The loan is secured by real estate, carries an interest rate of 6% and is due in September 2018. At March 31, 2014, the balance of this loan is $2,400,000 and the interest accrued but not paid is $180,000. In December 2012, the Company issued a note payable in the amount of $500,000 to a company under the control of our Board Member to acquire a building. The loan is secured by real estate, carries an interest rate of 6% and is due in September 2017. At March 31, 2014, the balance of this loan is $500,000 and the interest accrued but not paid is $37,500.

NOTE 5 – VERITY FARMS ACQUISITION

The Company recorded the acquisition at its fair market value in that the cash, accounts receivable, inventory, notes receivable, land, warehouses, equipment and other miscellaneous assets were recorded at their fair market value on the date of the acquisition. Impairment of goodwill from the date of acquisition was written off to its net realizable value in the accompanying statements of operations.

NOTE – 6 ACCOUNTS RECEIVABLE

Accounts receivable was comprised of the following amounts as of March 31, 2014 and March 31, 2013:

The bad debt expenses of $0 and $0 were recognized during the six months ended March 31, 2014 and 2013, respectively, in the accompanying consolidated statements of operations.

NOTE – 7 INVENTORIES

Inventories as of March 31, 2014 and September 30, 2013 consisted of the following:

The Company provides inventory allowances based on excess and obsolete inventories determined principally by customer demand. Accordingly, the Company recorded cost of goods sold due to inventories obsolescence in amount of $2,610 and $0 during the six months ended March 31, 2014 and 2013, respectively.

NOTE – 8 PREPAID EXPENSES

As of March 31, 2014 and September 30, 2013, the Company had prepaid expenses of $135,844 and $136,391, respectively, and consisted of the following: 

NOTE – 9 FIXED ASSETS

Depreciation expense for the six months ended March 31, 2014 and 2013 was $72,987 and $39,223, respectively.

Land valued at $2,400,000 as of March 31, 2014, includes a 240 acre parcel located in Sioux Falls, South Dakota. The Company acquired the land for the purposes of a future corporate campus and to create buffered test plots for our various farming operations. The property was originally acquired from a board member at an appraised value of $9,963 per acre.

Warehouses include two properties whose total value is $800,000 as of March 31, 2014. The first property is located in Pelham, Georgia, includes 16 acres, a 16,748 square foot building and is being used as a distribution center. The property was acquired from our board member for $500,000. Prior to the acquisition, the property was appraised for $469,000 and received improvements totaling $110,000 since its original purchase. The second warehouse, also being used as a distribution center, is located in Orange City, Iowa. The property was acquired from a third party for $300,000 and has a 6,600 square foot building on 20 acres of land.

NOTE – 10 INVESTMENT IN PARTNERSHIP

In 2006, Verity Farms II acquired a 19% interest in Crop Resources LLC by contributing $25,000 cash to the partnership. Investment in partnership was comprised of the following amounts as of March 31, 2014.

NOTE 11 – NOTES PAYABLE

Note payable: At March 31, 2014, the Company had a note payable to an affiliated company of one of our former officers in the amount of $28,955, which is not secured by collateral of the Company, carries accrued interest of 6% and is due on demand by the holder. In July 2013, the Company entered into a Mutual Rescission of Note Conversion and Reinstatement of Debt Agreement, Pursuant to which an aggregate of 900,000 shares of common stock were returned to the Company and $72,000 worth of note payable was reinstated.

Note payable- related party: At March 31, 2014, the Company had a note payable due to our Board Member in the amount of $341,267 which is secured by the Company’s ownership in Aistiva Corporation, carries accrued interest of 6% and is due on December 28, 2013, the interest accrued but not paid as of March 31, 2014 is $24,998. A second note payable to our Board Member in the amount of $3,220,000 is unsecured, carries an interest rate of 3% and is due on demand. The interest accrued, but not paid as of March 31, 2014 is $133,446. A third note payable to our Board Member in the amount of $150,000, is unsecured, carries an interest rate of 5% and is due on demand. The interest accrued but not paid as of March 31, 2014 is $18,154. A fourth note payable to our Board Member in the amount of $340,000, is unsecured, carries an interest rate of 3% and is due on demand. The interest accrued but not paid as of March 31, 2014 is $26,086.

Real estate loan: In December 2012, the Company issued a note payable in the amount of $278,500 to acquire a building from an unrelated party. The loan is secured by real estate, carries an interest rate of 4.7% and is due in January 2015. At March 31, 2014, the balance of this loan is $267,351 and the Company has paid $5,684 in interest during the six months ended March 31, 2014.

Real estate loan- related party: In December 2012, the Company issued a note payable in the amount of $2,400,000 to a company under the control of our Board Member to acquire land. The loan is secured by real estate, carries an interest rate of 6% and is due in September 2018. At March 31, 2014, the balance of this loan is $2,400,000 and the interest accrued but not paid is $180,000. In December 2012, the Company issued a note payable in the amount of $500,000 to a company under the control of our Board Member to acquire a building. The loan is secured by real estate, carries an interest rate of 6% and is due in September 2017. At March 31, 2014, the balance of this loan is $500,000 and the interest accrued but not paid is $37,500.

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

NOTE – 12 CUSTOMER DEPOSITS

As of March 31, 2014 and September 30, 2013, the Company had customer deposits of $25,299 and $10,241, respectively, representing payments received for orders not yet shipped.

NOTE 13 – SHAREHOLDERS’ EQUITY

On April 4, 2013, the Company effectuated a 1 for 100 reverse split of its common stock. All common stock and per share data for all periods presented in these financial statements have been restated to give effect to the reverse split.

On October 9, 2012, the Company issued 214,839 (post-reverse split) shares of common stock to Asher Enterprises, Inc to retire $31,306 in debt and accrued interest.

On November 11, 2012, the Company issued 225,492 (post-reverse split) shares of common stock to Auctus Private Equity Management, Inc. (“Auctus”) as commitment shares valued at $22,994 pursuant to the Equity Agreement.

On December 10, 2012, the Company issued 1,200,000 (post-reverse split) shares of common stock to four shareholders to retire a total of $95,182 in debt and accrued interest.

On December 31, 2012, the Company issued 250,000 (post-reverse split) shares of common stock to Trak Management Group, Inc. as compensation for consultation services valued at $25,000.

On December 31, 2012, the Company issued 150,000 (post-reverse split) shares of common stock as compensation for rendered professional services valued at $15,000.

On December 31, 2012, the Company issued 50,000 (post-reverse split) shares of common stock to Auctus as commitment shares valued at $4,000 pursuant to the Equity Agreement.

On December 31, 2012, the Company issued 4,850,000 shares of Series B Convertible Preferred Stock to its shareholders of Verity Farms II, Inc. valued at $4,850,000 pursuant to a share exchange agreement.

On February 26, 2013, the Company reduced the number of Series C preferred Stock from 10,000 shares to 51 shares.

On April 12, 2013, the Company issued 69,672 shares of common stock to Dayspring Capital as compensation for their consulting services valued at $29,958.

On April 12, 2013, the Company issued 278,686 shares of common stock to Maxim Partners LLC as compensation for their consulting services valued at $119,834.98.

On July 23, 2013, the Company entered into a Mutual Rescission of Note Conversion and Reinstatement of Debt Agreement, Pursuant to which an aggregate of 900,000 shares of common stock were returned to the Company and $72,000 worth of note payable was reinstated.

On August 22, 2013, 9 shareholders converted an aggregate of 582,000 shares of Series A preferred stock to 1,986,340 shares of common stock.

The company didn’t issue any stock for the three months ended March 31, 2014.

Note – 14 Subsequent Event

Termination of Contracts for Deed

In December 2012, our wholly owned subsidiary Verity Farms LLC (“Verity Farms”), entered into a Contract for Deed, as amended, with Spader, Inc. (“Spader”, a company controlled by Duane Spader, then an officer, Director and principal stockholder of the Verity Corp. (the “Company”). Pursuant to the Agreement, Verity Farms purchased certain real estate interests in South Dakota from Spader, in exchange for $2,400,000 to be paid over time. The Company has not made any payment to Spader under the agreement. On May 16, 2014, Verity Farms and Spader entered into a Termination Agreement, pursuant to which the property rights were returned to Spader and the financial obligations were terminated, resulting in the elimination of $2,400,000 owed to Spader, together with accrued interest of $192,000 as of April 30, 2014.

In December 2012, Verity Farms entered into a Contract for Deed, as amended, with Spader pursuant to which Verity Farms purchased certain real estate interests in Georgia from Spader, in exchange for $500,000 to be paid over time. The Company has not made any payment to Spader under the agreement. On May 16, 2014, Verity Farms and Spader entered into a Termination Agreement, pursuant to which the property rights were returned to Spader and the financial obligations were terminated, resulting in the elimination of $500,000 owed to Spader, together with accrued interest of $40,000 as of April 30, 2014.

Amendment to Loan Arrangements

The Company and its subsidiaries previously borrowed various amounts from Duane Spader. On May 16, the Company and its subsidiaries entered into agreements with Mr. Spader pursuant to which the maturity date of the loans was extended and interest payment dates were modified. Accrued Interest from December 31, 2012 to September 30, 2015 will be due and payable on or before September 30, 2015. After September 30, 2015, interest accrued will be due on or before September 30, 2016, 2017, 2018 and 2019. The principal amount of $3,220,000 will be due to lender in three annual payments as follows:

$1,073,333.34 plus any unpaid accrued interest …. Due September 30, 2017

$1,073,333.33 plus any unpaid accrued interest …. Due September 30, 2018

$1,073,333.33 plus any unpaid accrued interest …. Due September 30, 2019

In connection with the foregoing, the Company and its subsidiaries also granted security interests to Mr. Spader in substantially all of the Company’s and subsidiaries assets.

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:

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. Verity’s new CEO has been with Verity since 2011, managing the Company’s Sales & R&D departments until he was elected CEO in November 2013.

From FY 2004 through FY 2013, Verity focused on:

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 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 Six Months Ended March 31, 2014 compared with the Six Months Ended March 31, 2013.

Revenues

Revenues for the six months ended March 31, 2014 totaled $690,897 as compared to $682,786 for the six months ended March 31, 2013. Revenues increased 1% as compared to the six months ended March 31, 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. The Company expects revenues to increase during the growing season for farmers.

Cost of Goods Sold

Cost of goods sold for the six months ended March 31, 2014 was $318,092 as compared to $408,923 for the six months ended March 31, 2013. The decrease in cost of goods sold is due sales of higher margin items and product mix. Gross Margin for the six months ended March 31, 2014 was 53%. Gross Margin for the six months ended March 31, 2013 was 40%. Gross Margin has improved by 13% due to pricing, purchasing and product mix.

Operating Expenses

Operating expenses for the six months ended March 31, 2014 totaled $905,769 as compared to $1,078,544 for the six months ended March 31, 2013. The decrease in operating expenses of $172,775 is based on a decrease of $202,030 for consulting fees and professional fees, a decrease of $41,265 in management fees and decrease of $33,180 in general and office expenses.

Research and Development expenses increased $11,097 during the six months ended March 31, 2014. Depreciation expense increased $33,764 and payroll and other expenses increased $58,839.

Interest Expense

Interest Expense for the six months ended March 31, 2014 was $146,309 as compared to $44,187 for the six months ended March 31, 2013. The increase in interest expense is directly related to additional debt of Verity Corp related to land and buildings.

Net Loss Before Provision for Income Taxes

The net loss for the six months ended March 31, 2014 was $674,016 as compared to a net loss of $756,307 before loss on goodwill impairment, Verity Farms for the six months ended March 31, 2013. The decrease in operating net loss is based on increased 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 $429,594 for the six months ended March 31, 2014 as compared to $1,136,782 for the six months ended March 31, 2014. Negative cash flow is a direct result of operating expenses exceeding revenues generated during the six months ended March 31, 2014 and 2013.

Cash Flows used by Investing Activities was $71,955 for purchases of equipment during the six months ended March 31, 2014. For the six months ended March 31, 2014, cash flows from investing activities was $4,850,000 for the purchase of land, building and equipment.

Cash Flows provided by financing activities were $497,000 for the six months ended March 31, 2014 and $6,077,816 for the six months ended March 31, 2014. The cash provided by financing activities was related to proceeds received from notes payable.

As of March 31, 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.

Verity has been using a credit line that reached $2,805,000 on December 31, 2013. It is a private note held by a principal shareholder and board member. That line is reaching its maximum limit. As of December 31, 2013 the note was unsecured and accruing interest at 3%. A First Security Agreement granting first priority interest in all of Verity’s assets, wheresoever located and whether now existing or hereafter arising or acquired, has been granted in favor of the note holder as of January 3, 2014. That filing will replace a similar filing by a previous note holder.

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:

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 three months ended March 31, 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

* 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.