UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2022

 

or

 

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

 

For the transition period from _____________ to _____________

 

Commission File Number: 333-210190

 

Veritas Farms, Inc.

(Exact name of registrant as specified in its charter)

 

Nevada   90-1254190
(State or other jurisdiction of
incorporation or organization)		   (I.R.S. Employer
Identification No.)

 

1815 Griffin Road, Suite 401, Dania Beach, FL 33004

(Address of principal executive offices, including zip code)

 

(833) 691-4367

(Registrant’s telephone number, including area code)

 

No Changes

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

 

Securities registered pursuant to Section 12(b) of the Act: None

 

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 every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

 

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

 

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

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) 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 ☒

 

The number of shares outstanding of the registrant’s common stock, $0.001 par value, as of November 11, 2022 was 41,625,331 shares.

 

 

 

 

 

 

VERITAS FARMS, INC.

Quarterly Report on Form 10-Q for the nine month period ended September 30, 2022

TABLE OF CONTENTS

 

    Page
PART I – FINANCIAL INFORMATION 1
     
Item 1. Financial Statements (unaudited) 1
  Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021 1
  Condensed Consolidated Statements of Operations for the nine and three months ended September 30, 2022 and 2021 2
  Condensed Consolidated Statements of Shareholders’ Equity for the nine and three months ended September 30, 2022 and 2021 3
  Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021 4
  Notes to Condensed Consolidated Financial Statements 5
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 22
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 29
     
Item 4. Controls and Procedures 29
     
PART II - OTHER INFORMATION 31
     
Item 1. Legal Proceedings 31
     
Item 1A. Risk Factors 31
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 31
     
Item 3. Defaults Upon Senior Securities 31
     
Item 4. Mine Safety Disclosures 31
     
Item 5. Other Information 31
     
Item 6. Exhibits 31
     
SIGNATURES 32

 

i

 

 

PART I – FINANCIAL INFORMATION 

 

Item 1. Financial Statements

 

VERITAS FARMS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

 

   September 30,
2022		   December 31,
2021		 
         
ASSETS
         
CURRENT ASSETS        
Cash  $124,749   $481,763 
Inventories   3,509,421    3,211,882 
Accounts receivable, net of allowance for doubtful accounts   159,286    104,773 
Employee retention credit receivable   623,907    - 
Prepaid  expenses   108,388    243,273 
Total  current assets   4,525,751    4,041,691 
Property and equipment, net of accumulated depreciation   3,411,580    3,858,221 
Intangible assets, net of accumulated amortization   55,000    55,000 
Right of use assets, net of accumulated amortization   297,564    414,317 
Other assets   58,633    228,611 
           
TOTAL ASSETS  $8,348,528   $8,597,840 
           
LIABILITIES AND SHAREHOLDERS’ EQUITY          
           
CURRENT LIABILITIES          
Accounts payable  $1,264,772   $1,423,300 
Accrued expenses   131,789    144,534 
Accrued interest   193,560    28,881 
Dividends payable   495,008    195,830 
Convertible notes payable   200,000    200,000 
Deferred revenue   412,638    4,580 
Operating lease liability   149,900    150,135 
Notes payable, current portion   14,939    61,836 
Total current liabilities   2,862,606    2,209,096 
           
LONG TERM LIABILITIES          
Notes payable, long term, net of current portion   150,000    186,592 
Convertible notes payable, related parties, long term, net of current portion, net of discount   3,429,048    308,691 
Paycheck Protection Program loan   
-
    803,994 
Operating lease liability, net of current portion   145,176    264,182 
           
TOTAL LIABILITIES   6,586,830    3,772,555 
           
SHAREHOLDERS’ EQUITY          
Preferred stock, 5,000,000 shares authorized at $0.001 par value   
 
    
 
 
Series A convertible preferred stock, 4,000,000 shares authorized, 4,000,000 and 4,000,000 issued and outstanding, respectively, at $0.001 par value   4,000    4,000 
Series B convertible preferred stock, 1,000,000 shares authorized, 1,000,000 and 1,000,000 issued and outstanding, respectively, at $0.001 par value   1,000    1,000 
Common stock, 200,000,000 shares authorized, 41,625,331 and 41,625,331 issued and outstanding, respectively, at $0.001 par value   41,625    41,625 
Additional paid in capital   38,813,276    38,709,374 
Accumulated (deficit)   (37,098,203)   (33,930,714)
           
TOTAL SHAREHOLDERS’ EQUITY   1,761,698    4,825,285 
           
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY  $8,348,528   $8,597,840 

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements

 

1

 

 

VERITAS FARMS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

   For the nine months ended   For the three months ended 
   September 30,   September 30, 
   2022   2021   2022   2021 
Revenues  $948,046   $2,004,071   $180,408   $555,870 
                     
Cost of goods sold   1,007,616    1,287,505    363,975    282,117 
Total cost of goods sold   1,007,616    1,287,505    363,975    282,117 
                     
Gross margin/(expense)   (59,570)   716,566    (183,567)   273,753 
                     
Operating expenses                    
Selling, general and administrative   3,282,968    4,360,129    640,241    1,558,524 
Total operating expenses   3,282,968    4,360,129    640,241    1,558,524 
                     
Operating (loss)   (3,342,538)   (3,643,563)   (823,808)   (1,284,771)
                     
Other income/(expense)                    
Interest expense, related parties   (288,782)   (21,754)   (123,955)   (20,093)
Interest expense   (43,302)   (75,357)   (10,614)   (14,708)
Derivative (loss)   
-
    (14,500)   
-
    (7,000)
Gain on loan forgiveness   812,981    932,462    
-
    109,625 
Gain/(loss) on disposal   (6,670)   (219,361)   (20,855)   (219,361)
(Loss) on lease termination   
-
    (244,840)   
-
    
-
 
Total other income/(expense)   474,227    356,650    (155,424)   (151,537)
(Loss) before income taxes   (2,868,311)   (3,286,913)   (979,232)   (1,436,308)
Income tax provision   
-
    
-
    
-
    
-
 
Net (loss)   (2,868,311)   (3,286,913)   (979,232)   (1,436,308)
Preferred stock dividends                    
Preferred stock dividends in arrears   
 
    
 
    
 
    
 
 
Series A preferred stock   (239,342)   (64,104)   (80,657)   (42,625)
Series B preferred stock   (59,836)   (30,904)   (20,165)   (20,164)
Total preferred stock dividends   (299,178)   (95,008)   (100,822)   (62,789)
Net (loss) attributable to common shareholders  $(3,167,489)  $(3,381,921)  $(1,080,054)  $(1,499,097)
                     
Net (loss) per share                    
Basic  $(0.08)  $(0.08)  $(0.03)  $(0.04)
Diluted  $(0.08)  $(0.08)  $(0.03)  $(0.04)
Weighted average number of shares outstanding                    
Basic   41,625,331    43,968,420    41,625,331    41,974,977 
Diluted   41,625,331    43,968,420    41,625,331    41,974,977 

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements

 

2

 

 

VERITAS FARMS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

FOR THE NINE AND THREE MONTH PERIODS ENDED SEPTEMBER 30, 2022 AND SEPTEMBER 30, 2021

(unaudited)

 

FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2022

   Preferred Stock                
   Series A Preferred   Series B Preferred   Common Stock    Additional       Total 
   Number   $0.001   Number   $0.001   Number   $0.001   paid in   Accumulated   shareholders’ 
   of shares   Par value   of shares   Par value   of shares   Par value   capital   (deficit)   equity 
Balances at December 31, 2021   4,000,000   $4,000    1,000,000   $1,000    41,625,331   $41,625   $38,709,374   $(33,930,714)  $4,825,285 
                                              
Stock-based compensation                                 27,671         27,671 
                                              
Preferred stock dividends                                      (98,630)   (98,630)
                                              
Net (loss)                                      (1,282,912)   (1,282,912)
                                              
Balances at March 31, 2022   4,000,000    4,000    1,000,000    1,000    41,625,331    41,625    38,737,045    (35,312,256)   3,471,414 
                                              
Stock-based compensation                                 62,399         62,399 
                                              
Preferred stock dividends                                      (99,726)   (99,726)
                                              
Net (loss)                                      (606,167)   (606,167)
                                              
Balances at June 30, 2022   4,000,000    4,000    1,000,000    1,000    41,625,331    41,625    38,799,444    (36,018,149)   2,827,920 
                                              
Stock-based compensation                                 13,832         13,832 
                                              
Preferred stock dividends                                      (100,822)   (100,822)
                                              
Net (loss)                                      (979,232)   (979,232)
                                              
Balances at September 30, 2022   4,000,000   $4,000    1,000,000   $1,000    41,625,331   $41,625   $38,813,276   $(37,098,203)  $1,761,698 

  

FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2021

 

   Preferred Stock                
   Series A Preferred   Series B Preferred   Common Stock  Additional       Total 
   Number   $0.001   Number   $0.001   Number   $0.001   paid in   Accumulated   shareholders’ 
   of shares   Par value   of shares   Par value   of shares   Par value   capital   (deficit)   equity 
Balances at December 31, 2020   -   $-    -   $-    45,784,977   $45,785   $34,268,729   $(26,667,147)  $7,647,367 
                                              
Stock-based compensation                                 53,412         53,412 
                                              
Issuance of common stock for cash                       400,000    400    86,495         86,895 
                                              
Net (loss)                                      (1,154,659)   (1,154,659)
                                              
Balances at  March 31, 2021   -    -    -    -    46,184,977    46,185    34,408,636    (27,821,806)   6,633,015 
                                              
Stock-based compensation                                 601         601 
                                              
Issuance of Series A preferred stock   2,000,000    2,000              (4,000,000)   (4,000)   904,720         902,720 
                                              
Issuance of Series B preferred stock for cash             1,000,000    1,000              901,720         902,720 
                                              
Preferred stock dividends                                      (32,219)   (32,219)
                                              
Net (loss)                                      (695,946)   (695,946)
                                              
Balances at June 30, 2021   2,000,000    2,000    1,000,000    1,000    42,184,977    42,185    36,215,677    (28,549,971)   7,710,891 
                                              
Stock-based compensation                                 97,409         97,409 
                                              
Issuance of Series A preferred stock   2,000,000    2,000              (560,000)   (560)   1,858,560         1,860,000 
                                              
Preferred stock dividends                                      (62,789)   (62,789)
                                              
Net (loss)                                      (1,436,308)   (1,436,308)
                                              
Balances at September 30, 2021   4,000,000   $4,000    1,000,000   $1,000    41,624,977   $41,625   $38,171,646   $(30,049,068)  $8,169,203 

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements

 

3

 

 

VERITAS FARMS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

   For the nine months ended 
   September 30, 
   2022   2021 
         
CASH FLOWS FROM OPERATING ACTIVITIES        
Net (loss) attributable to common shareholders  $(3,167,489)  $(3,381,921)
Adjustment to reconcile net income/(loss) to net cash provided by/(used in) operating activities          
Depreciation and amortization   351,726    373,491 
Stock-based compensation   103,902    151,422 
Gain on loan forgiveness   (812,981)   (822,837)
Dividends payable   299,178    95,008 
Amortization of debt discount   120,357    23,750 
Net change in property and equipment assets upon disposal   71,294    107,516 
Net change in operating lease assets and liabilities   (2,488)   (39,662)
Changes in operating assets and liabilities          
Inventories   (297,539)   88,743 
Prepaid expenses   134,885    (387,348)
Accounts receivable   (54,513)   (141,545)
Employee retention credit receivable   (623,907)   
-
 
Other assets   169,978    154,892 
Deferred revenue   408,058    (11,208)
Accrued interest   164,679    20,342 
Accrued expenses   (3,758)   (257,586)
Accounts payable   (158,528)   (259,305)
Net cash (used in) operating activities   (3,297,146)   (4,286,248)
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Purchase of property and equipment   (5,069)   (53,898)
Sale of property and equipment   28,690    
-
 
Net cash provided by/(used in) investing activities   23,621    (53,898)
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Repayments of notes payable   (83,489)   (81,580)
Proceeds from convertible notes payable   3,000,000    
-
 
Proceeds from Paycheck Protection Program loan   
-
    803,994 
Proceeds from issuance of common stock   
-
    86,895 
Proceeds from issuance of preferred stock, net of transaction fees   
-
    3,665,440 
Net cash provided by financing activities   2,916,511    4,474,749 
           
Net increase/(decrease) in cash and cash equivalents   (357,014)   134,603 
Cash and cash equivalents at beginning of period   481,763    107,693 
           
Cash and cash equivalents at end of period  $124,749   $242,296 
           
Supplemental disclosures of cash flow information:          
Cash paid during the period for:          
Income taxes  $
-
   $
-
 
Interest  $15,907   $48,822 
           
Non-cash transactions:          
Right of use asset and lease liability recognized at issuance  $
-
   $160,476 
Issuance of preferred stock in exchange for common stock  $-   $971,930 
Issuance of preferred stock in exchange for notes payable  $-   $1,600,000 

 

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements

 

4

 

  

Veritas Farms, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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

 

Nature of Business

 

Veritas Farms, Inc. (“Company,” “Veritas Farms,” “we,” “us” and “our”), 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.,” and on January 31, 2019, the Company filed a Certificate of Amendment to the Articles of Incorporation with the Nevada Secretary of State changing the name from “SanSal Wellness Holdings, Inc.” to “Veritas Farms, Inc.” The Company’s business objectives are to produce natural rich-hemp products, using 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 on its 140-acre farm pursuant to federal law.

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial statements and with the instructions to Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Accordingly, they do not contain all information and footnotes required by U.S. GAAP for annual financial statements. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all the adjustments necessary (consisting only of normal recurring accruals) to present the financial position of the Company as of September 30, 2022 and September 30, 2021, and the results of operations and cash flows for the periods presented. The results of operations for the nine months ending September 30, 2022, are not necessarily indicative of the operating results for the full fiscal year or any future period. These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and related notes thereto included in the Company’s Form 10-K for the year ended December 31, 2021.

 

Principles of Consolidation

 

The accompanying unaudited condensed consolidated financial statements reflect the accounts of Veritas Farms, Inc. and its wholly owned subsidiary 271 Lake Davis Holdings, LLC, a Delaware limited liability company. All significant inter-company accounts and transactions have been eliminated in consolidation.

 

Estimates in Financial Statements

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Actual results could differ from these estimates.

 

Reclassifications

 

Certain reclassifications have been made in the 2021 financial statements to conform to the 2022 presentation. These reclassifications did not have any effect on our net income/(loss) or shareholders’ deficit.

 

5

 

 

Veritas Farms, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Fair Value Measurement

 

The Company has adopted the provisions of Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures (“ASC 820”), 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. The carrying amount reported in the accompanying unaudited condensed consolidated balance sheets approximates fair value. At times, cash and cash equivalents may be in excess of FDIC insurance limits of $250,000. The Company had no cash equivalents as of September 30, 2022 and December 31, 2021.

 

Revenue Recognition

 

Under ASC 606, Revenue from Contracts with Customers (“ASC 606”), 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 Accounting Standards Update (“ASU”) 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.

 

The Company’s product revenue is generated primarily through two sales channels, e-commerce sales and wholesale sales. The Company believes that these categories appropriately reflect how the nature, amount, timing and uncertainty of revenue and cash flows are impacted by economic factors.

 

6

 

 

Veritas Farms, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

A description of the Company’s principal revenue generating activities are as follows:

 

●E-commerce sales - consumer products sold through the Company’s online and telephonic channels. Revenue is recognized when control of the merchandise is transferred to the customer, which generally occurs upon shipment. Payment is typically due prior to the date of shipment; and

 

●Wholesale sales - products sold to the Company’s wholesale customers for subsequent resale. Revenue is recognized when control of the goods is transferred to the customer, in accordance with the terms of the applicable agreement. Payment terms vary and can typically be 30 days from the date control over the product is transferred to the customer.

 

The following tables represent a disaggregation of revenue by sales channel:

 

   For the nine months ended   For the three months ended 
   September 30,   September 30, 
   2022   2021   2022   2021 
Wholesale revenue  $320,973   $912,401   $5,233   $332,882 
E-commerce revenue   627,073    1,091,670    175,175    222,988 
Total revenue  $948,046   $2,004,071   $180,408   $555,870 

 

Cost of Goods Sold

 

Cost of goods sold includes the costs directly attributable to production of inventory such as cultivation costs, extraction costs, packaging costs, security, and allocated overhead. Overhead expenses include allocations of rent, administrative salaries, utilities, and related costs.

 

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.

 

Property and Equipment

 

Purchases of property and equipment are recorded at cost. Improvements and replacements of property 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 unaudited condensed consolidated statements of operations. Depreciation is recognized 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 September 30, 2022 and December 31, 2021.

 

7

 

 

Veritas Farms, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Convertible Instruments

 

The Company evaluates and accounts for conversion options embedded in convertible instruments in accordance with ASC 815, Derivatives and Hedging Activities.

 

Applicable U.S. GAAP requires companies to bifurcate conversion options from their host instruments and account for them as free-standing derivative financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under other U.S. GAAP with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.

 

The Company accounts for convertible instruments (when we have determined that the embedded conversion options should not be bifurcated from their host instruments) as follows: the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their stated date of redemption.

 

The Company records a discount to convertible notes and convertible preferred stock for the intrinsic value of conversion options embedded in the instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the transaction and the effective conversion price embedded in the instrument, if applicable. Debt discounts under these arrangements are amortized to noncash interest expense using the effective interest rate method over the term of the related debt to their date of maturity. If a security or instrument becomes convertible only upon the occurrence of a future event outside the control of the Company, or, is convertible from inception, but contains conversion terms that change upon the occurrence of a future event, then any contingent beneficial conversion feature is measured and recognized when the triggering event occurs and contingency has been resolved.

 

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 services similar 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

 

 

Veritas Farms, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

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 non-employees in the same manner in which it accounts for stock-based compensation for employees.

 

Income Taxes

 

The Company accounts for income taxes under ASC 740, Income Taxes (“ASC 740”). 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 ASC 740, 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 in progress for any open tax periods.

 

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 September 30, 2022 and December 31, 2021.

 

Leases

 

The Company has two leased buildings that are classified as operating lease right of use (“ROU”) assets and operating lease liabilities in the Company’s unaudited condensed consolidated balance sheets. ROU assets and lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at the commencement date for leases exceeding 12 months. Minimum lease payments include only the fixed lease component of the agreement. Operating lease expense is recognized on a straight-line basis over the lease term and is included in Selling, general and administrative expenses.

 

9

 

  

Veritas Farms, Inc. and Subsidiary

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Related Party Transactions

 

The Company follows ASC 850, Related Party Disclosures, (“ASC 850”) 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.

 

In accordance with ASC 850, the unaudited condensed consolidated financial statements 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 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 for 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.

 

Impact of New Accounting Standards

 

Accounting standards-setting organizations frequently issue new or revised accounting rules. We regularly review all new pronouncements to determine their impact, if any, on our financial statements.

 

In August 2020, the Financial Accounting Standards Board issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”). ASU 2020-06 reduces the number of accounting models for convertible debt instruments and convertible preferred stock. Additionally, ASU 2020-06 removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception and simplifies the diluted earnings per share calculation in certain areas. ASU 2020-06 is effective for the Company starting January 1, 2024 and early adoption is allowed. The company is analyzing the effect of this standard.

 

NOTE 2: GOING CONCERN

 

The accompanying financial statements have been prepared in conformity with U.S. GAAP, which contemplate continuation of the Company as a going concern. The Company has sustained substantial losses from operations since its inception. As of and for the period ended September 30, 2022, the Company had an accumulated deficit of $37,098,203, and a net loss attributable to common shareholders of $3,167,489. These factors, among others, raise substantial doubt about the ability of the Company to continue as a going concern. A going concern disclosure means that there is substantial doubt that the company can continue as an ongoing business for the next 12 months from the date the financial statements are issued. Continuation as a going concern is dependent on the ability to raise additional capital and financing until we can achieve a level of operational profitability, though there is no assurance of success.

 

The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.

 

10

 

 

Veritas Farms, Inc. and Subsidiary

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Management Plans

 

The Company believes that it will require additional financing to fund its growth and achieve profitability The Company anticipates that such financing, will be generated from subsequent private offerings of its equity and/or debt securities.

 

NOTE 3: INVENTORIES

 

Inventories consist of:

 

   September 30,
2022		   December 31,
2021		 
Work in progress  $2,456,376   $1,967,648 
Finished goods   354,360    547,543 
Other   698,685    696,691 
Inventories  $3,509,421   $3,211,882 

 

NOTE 4: PROPERTY AND EQUIPMENT

 

   September 30, 2022   December 31, 2021   Estimated 
   Cost   Accumulated
depreciation		   Net book
value		   Cost   Accumulated
depreciation		   Net book
value		   useful life
(years)		 
Land and land improvements  $398,126   $
-
   $398,126   $398,126   $
-
   $398,126    
-
 
Buildings and improvements   1,523,029    235,497    1,287,532    1,520,447    204,350    1,316,097    39 
Greenhouse   965,388    150,884    814,504    965,388    130,647    834,741    39 
Fencing and irrigation   203,793    112,619    91,174    203,793    97,740    106,053    15 
Machinery and equipment   2,171,210    1,393,228    777,982    2,337,950    1,229,585    1,108,365    7 
Furniture and fixtures   94,485    74,299    20,186    230,347    165,892    64,455    7 
Computer equipment   22,038    20,345    1,693    22,038    19,681    2,357    5 
Vehicles   56,058    35,675    20,383    56,058    28,031    28,027    5 
Total  $5,434,127   $2,022,547   $3,411,580   $5,734,147   $1,875,926   $3,858,221      

  

Total depreciation expense was $351,726 and $373,491 for the nine month periods ending September 30, 2022 and September 30, 2021, respectively. Total depreciation expense was $113,746 and $111,963 for the three month periods ending September 30, 2022 and September 30, 2021, respectively.

 

11

 

 

Veritas Farms, Inc. and Subsidiary

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

NOTE 5: NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLE

 

The following tables summarize the notes payable and convertible notes payable outstanding as of September 30, 2022.

 

             Ending
principal		   Non related party   Related party 
Description  Origination
date		  Maturity
date		  Interest
rate		   September 30,
2022		   Current   Long
term		   Current   Long
term		 
Note Payable  11/29/2018  12/1/2022   9%  $9,762   $9,762   $      -   $       -   $     - 
Note Payable  5/10/2019  5/10/2023   9%   5,177    5,177    -    -    - 
Economic Injury Disaster Loan  6/24/2020  6/24/2050   4%   150,000    -    150,000    -    - 
Total             $164,939   $14,939   $150,000   $-   $- 

 

             Ending
principal		   Non related party   Related party 
Description  Origination
date		  Maturity
date		  Interest
rate		   September 30,
2022		   Current   Long
term		   Current   Long
term		 
Convertible Promissory Note Payable  3/6/2020  10/1/2022   10%  $200,000   $200,000   $
          -
   $
       -
   $
-
 
Secured Convertible Promissory Note Payable  10/12/2021  10/1/2024   10%   3,000,000    
-
    
-
    
-
    3,000,000 
Convertible Promissory Note Payable  8/2/2022  10/1/2024   10%   250,000    -    -    -    250,000 
Convertible Promissory Note Payable  8/17/2022  10/1/2024   10%   250,000    -    -    -    250,000 
Convertible Promissory Note Payable  9/6/2022  10/1/2024   10%   250,000    -    -    -    250,000 
Discount                                  (320,952)
Total             $3,950,000   $200,000   $
-
   $
-
   $3,429,048 

  

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

 

2022  $211,930 
2023   6,442 
2024   3,753,295 
2025   3,420 
2026   3,551 
Thereafter   136,301 
Total  $4,114,939 

 

12

 

 

Veritas Farms, Inc. and Subsidiary

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Paycheck Protection Program

 

In May 2020, as part of the business incentives offered in the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), the Company received a loan in the amount of $803,994 under U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“2020 PPP Loan”). In June 2021, the 2020 PPP Loan principal and all accrued interest totaling $822,837 was forgiven in full.

 

In February 2021, as part of the business incentives offered in the CARES Act, the Company received a second loan in the amount of $803,994 under the SBA Paycheck Protection Program (“2021 PPP Loan”). In April 2022, the 2021 PPP Loan principal and all accrued interest totaling $812,981 was forgiven in full.

 

Economic Injury Disaster Loan

 

In June 2020, the Company received a loan in the amount of $150,000 from the SBA as an Economic Injury Disaster Loan (“EIDL”). The EIDL accrues interest at the rate of three and three quarters percent (3.75%) per annum and has a term of 30 years. The first payment due is deferred two and a half years. The principal balance of the EIDL as of September 30, 2022 has been classified as a long-term liability in notes payable.

 

8% Secured Convertible Promissory Notes Payable

 

On April 19, 2021, the Company issued a secured convertible promissory note in the principal amount of $25,000 to our Chairman of the Board, Thomas E. Vickers (“Mr. Vickers”). The note carried an interest rate of eight percent (8%) per annum and had a maturity date of May 19, 2021. On May 19, 2021, the Company and Mr. Vickers extended the maturity date of the note to October 1, 2021. On September 1, 2021, Mr. Vickers converted the outstanding $25,000 in principal in accordance with the note’s terms and $25,000 in additional cash consideration in exchange for 50,000 shares of the Company’s Series A Convertible Preferred Stock (“Series A Preferred Shares”).

 

On July 22, 2021, the Company issued secured convertible promissory notes in the aggregate principal amount of $1,075,000 in exchange for an aggregate amount of $1,075,000, which secured convertible promissory notes were issued to the Cornelis F. Wit Revocable Living Trust, of which Cornelis F. Wit is trustee (“Wit Trust”), a principal shareholder who holds securities of the Company that constitute a majority of the voting securities of the Company, in the amount of $1,000,000, Stephen E. Johnson, our former Chief Executive Officer and President of the Company (“Mr. Johnson”), in the amount of $50,000, and Ramon A. Pino, Chief Financial Officer of the Company (“Mr. Pino”), in the amount of $25,000. These secured convertible promissory notes accrued interest at eight percent (8%) per annum and had a maturity date of (i) April 1, 2022, or October 1, 2021. On August 18, 2021, Mr. Pino converted the outstanding $25,000 in principal in accordance with the note’s terms in exchange for 25,000 Series A Preferred Shares. On September 7, 2021, Mr. Johnson converted the outstanding $50,000 in principal in accordance with the note’s terms in exchange for 50,000 Series A Preferred Shares. On September 30, 2021, the Wit Trust converted the outstanding $1,000,000 in principal in exchange for 1,000,000 Series A Preferred Shares.

 

On August 30, 2021, the Company issued a secured convertible promissory note in the aggregate principal amount of $500,000 to the Wit Trust. The note carried an interest rate of eight percent (8%) per annum and had a maturity date of April 1, 2022. On September 30, 2021, the Wit Trust converted the outstanding $500,000 in principal in accordance with the note’s terms in exchange for 500,000 Series A Preferred Shares.

 

13

 

 

Veritas Farms, Inc. and Subsidiary

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

10% Convertible Promissory Note Payable

 

In March 2020, the Company received a $200,000 loan from a single investor, evidenced by a one-year convertible promissory note (“Convertible Note”). The Convertible Note bears interest at the rate of ten percent (10%) per annum, which accrues and is payable together with principal at maturity. Principal and accrued interest under the Convertible Note may, at the option of the holder, be converted in its entirety into shares of our common stock at a conversion price of $0.40 per share, subject to adjustment for stock splits, stock dividends and similar recapitalization transactions. On May 14, 2021, the Company paid $20,000 in accrued interest to the holder, and the Company and the investor extended the maturity date of the Convertible Note to September 6, 2021. In September 2021, the Company and the investor further extended the maturity date of the Convertible Note to October 1, 2022.

 

The Company determined that there was a beneficial conversion feature of $95,000 relating to the Convertible Note which is being amortized over the life of the note, using the effective interest method. The note is presented net of a discount of $0 as of September 30, 2022 and $0 as of December 31, 2021 on the accompanying balance sheet with amortization to interest expense of $0 and $23,750 for the nine month periods ended September 30, 2022 and September 30, 2021, respectively.

 

10% Secured Convertible Promissory Notes Payable

 

On October 12, 2021, the Company issued a secured convertible credit line promissory note in the principal amount for up to $1,500,000 (“Secured Convertible Promissory Note”), which Secured Convertible Promissory Note was issued to the Wit Trust. On March 9, 2022, the Company amended the Secured Convertible Promissory Note originally dated October 12, 2021 to increase the total available principal balance to $3,000,000. The Secured Convertible Promissory Note is secured by the Company’s assets and contains certain non-financial covenants and customary events of default, the occurrence of which could result in an acceleration of the Secured Convertible Promissory Note. The Secured Convertible Promissory Note is convertible as follows: aggregate outstanding loaned principal and accrued interest under the Secured Convertible Promissory Note may, at the option of the holder, be converted in its entirety into shares of our common stock at a conversion price of $0.05 per share. The Secured Convertible Promissory Note will accrue interest on the aggregate amount loaned at a rate of ten percent (10%) per annum. All unpaid principal, together with any then unpaid and accrued interest and other amounts payable under the Secured Convertible Promissory Note, is due and payable if not converted pursuant to the terms and conditions of the Secured Convertible Promissory Note on the earlier of (i) October 1, 2024, or (ii) following an event of default. The Company determined that there was a beneficial conversion feature of $475,000 relating to this note which is being amortized over the life of the note, using the using the effective interest method. The note is presented net of a discount of $320,952 on the accompanying balance sheet with amortization to interest expense of $120,357 and $0 for the nine month periods ended September 30, 2022 and September 30, 2021, respectively. At September 30, 2022, $3,000,000 was outstanding on the Secured Convertible Promissory Note.

 

On August 2, 2022, the Company issued a secured convertible promissory note in the principal amount of $250,000 to the Wit Trust in exchange for $250,000. The note carries an interest rate of ten percent (10%) per annum and has a maturity date of October 1, 2024.

 

On August 17, 2022, the Company issued a secured convertible promissory note in the principal amount of $250,000 to the Wit Trust in exchange for $250,000. The note carries an interest rate of ten percent (10%) per annum and has a maturity date of October 1, 2024.

 

On September 6, 2022, the Company issued a secured convertible promissory note in the principal amount of $250,000 to the Wit Trust in exchange for $250,000. The note carries an interest rate of ten percent (10%) per annum and has a maturity date of October 1, 2024.

 

The secured convertible promissory notes issued in August and September 2022 are secured by the Company’s assets and contains certain non-financial covenants and customary events of default, the occurrence of which could result in an acceleration of the secured convertible promissory notes. These secured convertible promissory notes are convertible as follows: prior to the Company closing a financing through the sale and issuance of the Company’s equity securities, debt, convertible debt, a combination of the foregoing or otherwise (“Conversion Securities”), on or prior to the maturity date, (the “Financing”), the holder of the note has the right to convert (A) all or a partial amount of the principal, and (B) all or a partial amount of the accrued but unpaid interest thereon through and as of the date of the closing of the Financing, into the identical Conversion Securities issued at such Financing.

 

NOTE 6: STOCK-BASED COMPENSATION

 

The Company approved its 2017 Stock Incentive Plan on September 27, 2017 (“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 6,867,747 shares of common stock. 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 at the time of grant by the Board of Directors or any committees appointed under the Incentive Plan.

 

The Company’s outstanding stock options typically have a 10-year term. Outstanding non-qualified stock options granted to employees and consultants vest on a case-by-case basis. Outstanding incentive stock options issued to employees typically vest over a three-year period. The incentive stock options granted vest based solely upon continued employment. The Company’s time-based share awards typically vest in thirty three and a third percent (33.3%) increments on each of the three anniversary dates of the date of grant.

 

14

 

 

Veritas Farms, Inc. and Subsidiary

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

On May 12, 2021, the Company granted four non-employee directors with an annual grant of stock options under the Incentive Plan to purchase 100,000 shares of common stock each, at a per share exercise price of $0.16 with a term of ten (10) years, with twenty five percent (25%) of the options vesting every ninety (90) days following the grant date subject to the director’s continuous service to the Company. On May 12, 2021, the Company also granted (i) Mr. Johnson stock options under the Incentive Plan to purchase 450,000 shares of common stock, at a per share exercise price of $0.16 with a term of ten (10) years. The stock options will vest ratably on the first three anniversaries of the grant date subject to Mr. Johnson’s continuous service to the Company and (ii) Mr. Pino stock options under the Incentive Plan to purchase 385,000 shares of common stock, at a per share exercise price of $0.16 with a term of ten (10) years. The stock options will vest ratably on the first three anniversaries of the grant date subject to Mr. Pino’s continuous service to the Company. In addition the Company also granted 150,000 stock options to purchase shares of common stock at a per share exercise price of $0.38 and 100,000 stock options to purchase shares of common stock at a per share exercise price of $0.11 during the year ended December 31, 2021. The aggregate fair value for all options granted for the year ended December 31, 2021 was $263,500.

 

On January 1, 2022, the Company granted an aggregate 625,000 options to employees, including 300,000 options to Dave Smith, our former Chief Operating Officer under the Incentive Plan, at a per share exercise price of $0.049 with a term of ten (10) years. The stock options will vest ratably on the first three anniversaries of the grant date subject to the employee’s continuous service to the Company.

 

On June 30, 2022, the Company granted an aggregate 950,000 options to employees and directors, including five non-employee directors with an annual grant of stock options under the Incentive Plan to purchase 100,000 shares of common stock each, at a per share exercise price of $0.031 with a term of ten (10) years, with twenty five percent (25%) of the options vesting every ninety (90) days following the grant date subject to the director’s continuous service to the Company. The employee stock options will vest ratably on the first three anniversaries of the grant date subject to the employee’s continuous service to the Company. The aggregate fair value for all options granted for the nine months ended September 30, 2022 was $58,767.

 

Total stock based compensation expense was $103,902 and $151,422 for the nine month periods ending September 30, 2022 and September 30, 2021, respectively. Total stock based compensation expense was $13,832 and $97,409 for the three month periods ending September 30, 2022 and September 30, 2021, respectively.

 

The following table summarizes the stock option activity for the Company’s Incentive Plan:

 

   Number of options   Weighted average exercise price
(per share)		   Weighted average remaining contractual term
(in years)		 
             
Outstanding at December 31, 2020   4,193,750   $1.11    8.03 
Granted   1,485,000    0.18    9.31 
Exercised   
-
    
-
    
 
 
Forfeited/cancelled/expired   (489,583)   1.04    
 
 
Outstanding at December 31, 2021   5,189,167    0.86    7.71 
Granted   1,575,000    0.04    9.55 
Exercised   
-
    
-
    
 
 
Forfeited/cancelled/expired   (1,404,167)   0.49    
 
 
Outstanding at September 30, 2022   5,360,000   $0.71    7.38 
                
Vested and exercisable at September 30, 2022   4,303,333   $0.87    6.88 

 

Below are the assumptions for the fair value of share-based payments for the nine month period ended September 30, 2022 and the year ended December 31, 2021.

 

   Stock option assumptions
for the period ended		 
Stock option assumptions  September 30,
2022		   December 31,
2021		 
Risk-free interest rate   2.80%   1.32%
Expected dividend yield   0.0%   0.0%
Expected volatility   170.0%   147.8%
Expected life of options (in years)   10    10 

 

15

 

 

Veritas Farms, Inc. and Subsidiary

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

NOTE 7: LEASES

 

On June 22, 2018, the Company entered into a sublease agreement with EDSA Inc. for the lease of principal executive offices for the Company in Fort Lauderdale, Florida. The lease contained annual escalators and charged Florida sales tax. The lease went into effect as of July 1, 2018 and expired pursuant to the terms of the lease on August 31, 2021.

 

On December 2, 2019, the Company entered into a 61 month lease with Majestic Commercenter Phase 9, LLC. (“Majestic”), for warehousing, distribution and related administration office in Aurora, Colorado. The lease allowed for an abated first month of rent. The lease contained annual escalators in addition to other periodic payments pertaining to taxes, utilities, insurance and common area costs. On February 10, 2021, the Company entered into a conditional lease termination agreement with Majestic pursuant to which the Company terminated the lease with Majestic (“Majestic Termination Agreement”). Pursuant to the terms of the Majestic Termination Agreement, the Company made a payment of $125,000 on February 23, 2021 and a final payment of $125,000 on April 30, 2021, upon which both parties were released from all further obligations to each other. The net expense on the termination of the lease was $244,840. The expense was reported as Other income/(expense), loss on lease termination.

 

On February 11, 2021, the Company entered into a three year lease with Cheyenne Avenue Holdings, LLC for warehouse and distribution facilities. The lease contains annual escalators. The Company analyzed the classification of the lease under ASC 842, Leases (“ASC 842”) and as it did not meet any of the criteria for a financing lease it has been classified as an operating lease. The Company determined the ROU asset and lease liability values at inception by calculating the present value of all future lease payments for the lease term, using an incremental borrowing rate of five percent (5%). The ROU asset value was $160,476 and the liability was $160,476. The lease liability will be expensed each month, on a straight-line basis, over the life of the lease.

 

On September 8, 2021, the Company entered into a thirty nine month lease with 1815 Building Company, for the lease of the Company’s principal executive offices in Dania Beach, Florida. The lease contains annual escalators and charges Florida sales tax. The lease commenced into effect on October 12, 2021 and expires on January 31, 2025. The Company analyzed the classification of the lease under ASC 842, and as it did not meet any of the criteria for a financing lease it has been classified as an operating lease. The Company determined the ROU asset and lease liability values at inception by calculating the present value of all future lease payments for the lease term, using an incremental borrowing rate of five percent (5%). The ROU asset value was $298,364 and the liability was $298,364. The lease liability will be expensed each month, on a straight-line basis, over the life of the lease.

 

Total lease amortization expense was $116,752 and $109,442 for the nine month periods ending September 30, 2022 and September 30, 2021, respectively. Total lease amortization expense was $37,084 and $26,404 for the three month periods ending September 30, 2022 and September 30, 2021, respectively.

 

As of September 30, 2022, and December 31, 2021, operating leases have no minimum rental commitments.

 

NOTE 8: SHAREHOLDERS’ (DEFICIT)

 

Our authorized capital stock consists of 200,000,000 shares of common stock, $0.001 par value per share and 5,000,000 shares of preferred stock, par value $0.001 per share, of which 4,000,000 shares of preferred stock have been designated as Series A Convertible Preferred Stock and 1,000,000 shares of preferred stock have been designated as Series B Convertible Preferred Stock.

 

As of September 30, 2022 we had the following issued and outstanding securities:

 

  ● 41,625,331 shares of common stock;

 

  ● 4,000,000 shares of Series A Convertible Preferred Stock;

 

  ● 1,000,000 shares of Series B Convertible Preferred Stock;

 

  ● 2,595,270 warrants to purchase shares of our common stock;

 

  ● 5,360,000 options to purchase shares of our common stock; and

 

  ● $3,200,000 principal amount of convertible promissory notes convertible into 60,500,000 shares of common stock.

 

16

 

 

Veritas Farms, Inc. and Subsidiary

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Common Stock

 

In September 2020, the Company commenced a $4.0 million private offering of up to 8,000,000 Units (“Units”) at a price of $0.50 per Unit, which private offering ended April 30, 2021. Each Unit consists of (a) two shares of common stock; and (b) one warrant, entitling the holder to purchase one share of our common stock at an exercise price of $0.50 at any time through August 31, 2025. As of December 31, 2020, the Company sold 2,080,000 Units in the private offering for gross proceeds of $1,040,000 with offering costs of $154,965 resulting in net proceeds of $885,035. From January 1, 2021 through April 30, 2021, the Company sold an additional 200,000 Units for gross proceeds of $100,000 with offering costs of $13,105 resulting in net proceeds of $86,895. The terms of this offering provided that, if during the one-year period from the final closing of the offering, the Company undertakes a subsequent private offering of its equity, equity equivalent or debt securities (“Subsequent Offering”), the investor will be entitled to exchange their Units purchased in the offering for an equivalent dollar amount of securities sold in the Subsequent Offering (based on the respective offering prices). The Company also entered into a registration rights agreement with the investors which states, among other things, that the Company shall use commercially reasonable efforts to prepare and file with the SEC a registration statement covering, among other things, the resale of all or such portion of the registrable securities that are not then registered on an effective registration statement. As of September 30, 2021, all Unit holders converted their Units into Series A Preferred Shares.

 

Preferred Stock

 

On October 13, 2017, the Company filed Amended and Restated Articles of Incorporation of the Company which authorized preferred stock consisting of 5,000,000 shares, par value $0.001 per share, issuable from time to time in one or more series. On May 10, 2021, the Company filed a Certificate of Amendment to the Articles of Incorporation designating 4,000,000 shares of preferred stock as Series A Convertible Preferred Stock and 1,000,000 shares of preferred stock as Series B Convertible Preferred Stock.

 

On May 11, 2021, the Company entered into a Securities Purchase Agreement with the Wit Trust, pursuant to which the Company contemporaneously sold to the Wit Trust an aggregate of (a) 2,000,000 Series A Preferred Shares; and (b) 1,000,000 shares of its Series B Convertible Preferred Stock (“Series B Preferred Shares”) in exchange for (i) the payment of $2,000,000 (including $302,500 principal plus accrued but unpaid interest in bridge financing provided by the Wit Trust to the Company during April 2021); and (ii) the surrender by the Wit Trust to the Company of 2,000,000 Units, in accordance with the terms of the subscription agreements for the purchase of the Units entered into by the Wit Trust and the Company in September and October 2020. As a result of the transaction and the voting rights accorded the Series A Preferred Shares and Series B Preferred Shares as set forth below, the Wit Trust then held approximately eighty eight percent (88%) of the voting power of the Company and accordingly, a “Change in Control” occurred.

 

On September 30, 2021, the Company completed a private offering which commenced on August 5, 2021 of Series A Preferred Shares to certain investors, pursuant to which the Company sold an aggregate of 2,000,000 Series A Preferred Shares at a purchase price of $1.00 per share (“2021 Private Placement”) in exchange for (i) the payment of $1,860,000 (including $1,644,068.49 principal plus accrued but unpaid interest in bridge financing provided by certain investors during April, July and August 2021 upon the conversion of the investors’ secured convertible promissory notes, and conversion of an account payable); and (ii) the surrender of 280,000 Units, in accordance with the terms of the subscription agreements for the purchase of the Units entered into by certain investors and the Company in February through April 2021. The investors in the 2021 Private Placement included: Mr. Johnson upon the conversion of $50,000 promissory note; Mr. Pino upon the conversion of $25,000 promissory note; Mr. Vickers upon conversion of $50,000 promissory note and accounts payable; Kuno van der Post, a member of the Board of Directors of the Company (“Dr. van der Post”), in the amount of $50,000, and; the Wit Trust, in the amount of $65,931.51 and upon conversion of $1,500,000 secured convertible promissory notes and $19,068.49 in accrued and unpaid interest.

 

17

 

 

Veritas Farms, Inc. and Subsidiary

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Series A Convertible Preferred Stock

 

The Series A Preferred Shares have a stated value of $1.00 per share. Each Series A Preferred Share is convertible into the Company’s common stock at the option of the holder thereof at a conversion rate of $0.05 per share of common stock. The conversion rate is subject to adjustment in the event of stock splits, stock dividends, other recapitalizations and similar events, as well as in the event of issuance by the Company of shares of common stock or securities exercisable for, convertible into or exchangeable for common stock at an effective price per share less than the conversion rate then in effect (other than certain customary exceptions). In respect of rights to the payment of dividends and the distribution of assets in the event of any liquidation, dissolution or winding-up of the Company, the Series A Preferred Shares rank (a) junior to the Company’s Series B Preferred Shares; and (b) senior to (i) the Company’s common stock and any other class or series of stock (including other series of Preferred Stock) of the Company (collectively, “Junior Stock”). From and after the date of the issuance of Series A Preferred Shares, dividends at the rate per annum of eight percent (8%), compounded annually, accrue daily on the stated value (“Series A Accruing Dividends”). Series A Accruing Dividends shall accrue from day to day, whether or not declared, and shall be cumulative; provided, however, such Series A Accruing Dividends shall be payable only when, as, and if declared by the Board of Directors and the Company shall be under no obligation to pay such Series A Accruing Dividends except as set forth herein. The Company shall not declare, pay or set aside any dividends on shares of any other class or series of capital stock of the Company (other than dividends on (a) shares of Series B Preferred Shares; and (b) common stock payable in shares of common stock) unless (in addition to the obtaining of any consents required elsewhere in the Articles of Incorporation) the holders of the Series A Preferred Shares then outstanding shall first receive, or simultaneously receive, a dividend on each outstanding share of Series A Preferred Share in an amount at least equal to the sum of (a) the amount of the aggregate Series A Accruing Dividends then accrued on such Series A Preferred Shares and not previously paid; and (b) (i) in the case of a dividend on common stock or any class or series that is convertible into common stock, that dividend per Series A Preferred Share as would equal the product of (A) the dividend payable on each share of such class or series determined, if applicable, as if all shares of such class or series had been converted into common stock; and (B) the number of shares of common stock issuable upon conversion of a Series A Preferred Share, in each case calculated on the record date for determination of holders entitled to receive such dividend; or (ii) in the case of a dividend on any class or series that is not convertible into common stock, at a rate per Series A Preferred Share determined by (A) dividing the amount of the dividend payable on each share of such class or series of capital stock by the original issuance price of such class or series of capital stock (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to such class or series); and (B) multiplying such fraction by an amount equal to the stated value of the Series A Preferred Shares; provided, that if the Company declares, pays or sets aside, on the same date, a dividend on shares of more than one class or series of capital stock of the Company, the dividend payable to the holders of Series A Preferred Shares shall be calculated based upon the dividend on the class or series of capital stock that would result in the highest Series A Preferred Share dividend. In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company or any deemed liquidation event, (collectively, a “Liquidation Event”), the holders of Series A Preferred Shares shall be entitled to receive, after payment to all holders of Series B Preferred Shares of a liquidation preference equal to the aggregate amount of one hundred fifty percent (150%) of the stated value of the Series B Preferred Shares and the amount of the accrued but unpaid dividends on the Series B Preferred Shares, but prior and in preference to any distribution of any of the assets of the Company to the holders of Junior Stock by reason of their ownership thereof, an aggregate amount per share equal to the stated value of the Series A Preferred Shares and the accrued but unpaid dividends thereon. After the payment to all holders of Series B Preferred Shares of a liquidation preference equal to the aggregate amount of one hundred fifty percent (150%) of the stated value of the Series B Preferred Shares and the amount of the accrued but unpaid dividends on the Series B Preferred Shares and to all holders of the Series A Preferred Shares the full liquidation preference hereunder, the remaining assets of the Company available for distribution to its shareholders shall be distributed among the holders of the shares of Series B Preferred Shares and Junior Stock, pro rata, on an “as converted basis,” determined immediately prior to such Liquidation Event, and the Series A Preferred Shares shall not be entitled to participate in such distribution of the remaining assets of the Company. The Series A Preferred Shares shall vote together with holders of Series B Preferred Shares and holders of common stock as a single class on all matters brought to a vote of shareholders. Each Series A Preferred Share shall entitle the holder thereof to such number of votes as equal the number of shares of common stock then issuable upon conversion of the Series A Preferred Share. The Series A Preferred Shares also contain protective provisions which provide that the Company shall not undertake certain transactions without the prior approval of the holder(s) of a majority of the Series A Preferred Shares.

 

18

 

 

Veritas Farms, Inc. and Subsidiary

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Series B Convertible Preferred Stock

 

The Series B Preferred Shares have a stated value of $1.00 per share. Each Series B Preferred Share is convertible into common stock at the option of the holder thereof at a conversion rate of $0.20 per share of common stock. The conversion rate is subject to adjustment in the event of stock splits, stock dividends, other recapitalizations and similar events, as well as in the event of issuance by the Company of shares of common stock or securities exercisable for, convertible into or exchangeable for common stock at an effective price per share less than the conversion rate then in effect (other than certain customary exceptions). In respect of rights to the payment of dividends and the distribution of assets in the event of any liquidation, dissolution or winding-up of the Company, the Series B Preferred Shares rank senior to the (a) Series A Preferred Shares; (b) the Company’s common stock and any other class or series of Junior Stock. From and after the date of the issuance of Series B Preferred Shares, dividends at the rate per annum of eight percent (8%), compounded annually, accrue daily on the stated value (“Series B Accruing Dividends”). Series B Accruing Dividends shall accrue from day to day, whether or not declared, and shall be cumulative; provided, however, such Series B Accruing Dividends shall be payable only when, as, and if declared by the Board of Directors and the Company shall be under no obligation to pay such Series B Accruing Dividends except as set forth herein. The Company shall not declare, pay or set aside any dividends on shares of any other class or series of capital stock of the Company (other than dividends on (a) shares of Series B Preferred Shares; and (b) common stock payable in shares of common stock) unless (in addition to the obtaining of any consents required elsewhere in the Articles of Incorporation) the holders of the Series B Preferred Shares then outstanding shall first receive, or simultaneously receive, a dividend on each outstanding share of Series B Preferred Share in an amount at least equal to the sum of (a) the amount of the aggregate Series B Accruing Dividends then accrued on such Series B Preferred Shares and not previously paid; and (b) (i) in the case of a dividend on common stock or any class or series that is convertible into common stock, that dividend per Series B Preferred Share as would equal the product of (A) the dividend payable on each share of such class or series determined, if applicable, as if all shares of such class or series had been converted into common stock; and (B) the number of shares of common stock issuable upon conversion of a Series B Preferred Share, in each case calculated on the record date for determination of holders entitled to receive such dividend; or (ii) in the case of a dividend on any class or series that is not convertible into common stock, at a rate per Series B Preferred Share determined by (A) dividing the amount of the dividend payable on each share of such class or series of capital stock by the original issuance price of such class or series of capital stock (subject to appropriate adjustment in the event of any stock dividend, stock split, combination or other similar recapitalization with respect to such class or series); and (B) multiplying such fraction by an amount equal to the stated value of the Series B Preferred Shares; provided, that if the Company declares, pays or sets aside, on the same date, a dividend on shares of more than one class or series of capital stock of the Company, the dividend payable to the holders of Series B Preferred Shares shall be calculated based upon the dividend on the class or series of capital stock that would result in the highest Series B Preferred Share dividend. In the event of a Liquidation Event, the holders of Series B Preferred Shares shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Company to the holders of Junior Stock (including Series A Preferred Shares), a liquidation preference equal to the aggregate amount of one hundred fifty percent (150%) of the stated value of the Series B Preferred Shares and the amount of the accrued but unpaid dividends on the Series B Preferred Shares. After the payment to all holders of Series B Preferred Shares of such liquidation preference and to all holders of the Series A Preferred Shares their full liquidation preference, the remaining assets of the Company available for distribution to its shareholders shall be distributed among the holders of the shares of Series B Preferred Shares and Junior Stock other than Series A Preferred Shares, pro rata, on an “as converted basis,” as applicable. The Series B Preferred Shares shall vote together with holders of Series A Preferred Shares and holders of common stock as a single class on all matters brought to a vote of shareholders. Each Series B Preferred Share shall entitle the holder thereof to such number of votes as equal the number of shares of common stock then issuable upon conversion of the Series B Preferred Share multiplied by 50. The Series B Preferred Shares also contain protective provisions which provide that the Company shall not undertake certain transactions without the prior approval of the holder of the Series B Preferred Shares.

 

Preferred Stock Dividends

 

The following table presents undeclared preferred stock dividends for the nine month and three month periods ended September 30, 2022 and September 30, 2021, respectively.

 

   Undeclared dividends   Undeclared dividends 
  

For the nine months ended

   For the three months ended 
   September 30,   September 30, 
Series of preferred stock  2022   2021   2022   2021 
Series A preferred stock dividends  $239,342   $64,104   $80,658   $42,625 
Series B preferred stock dividends   59,836    30,904    20,164    20,164 
Total undeclared preferred stock dividends  $299,178   $95,008   $100,822   $62,789 

 

19

 

 

Veritas Farms, Inc. and Subsidiary

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

The following table presents the cumulative undeclared dividends by class of preferred stock as of September 30, 2022 and September 30, 2021, respectively. These cumulative undeclared dividends are recorded in Dividends payable on our balance sheet as of September 30, 2022 and September 30, 2021.

 

   Cumulative undeclared
dividends
as of		 
   September 30, 
Series of preferred stock  2022   2021 
Series A preferred stock  $384,104   $64,104 
Series B preferred stock   110,904    30,904 
Cumulative undeclared preferred stock dividends  $495,008   $95,008 

 

NOTE 9: CONCENTRATIONS

 

The Company had no single customer for the nine months ended September 30, 2022 that accounted for more than 10% of sales. For the nine months ended September 30, 2021, one customer accounted for 17% of sales.

 

The Company had four customers at September 30, 2022 accounting for 30%, 23%, 11% and 11% of relative total accounts receivable. At December 31, 2021, the Company had two customers accounting for 30% and 29% of relative total accounts receivable.

 

NOTE 10: RELATED PARTY

 

A law firm owned by the brother of Alexander M. Salgado, our former Chief Executive Officer, rendered legal services to the Company. The Company incurred expenses in aggregate of $0 and $20,020 for such services during the nine month periods ended September 30, 2022 and September 30, 2021, respectively.

 

On April 19, 2021, the Company issued a secured convertible promissory note in the principal amount of $25,000 to Mr. Vickers. The note carried an interest rate of eight percent (8%) per annum and had a maturity date of May 19, 2021. On May 19, 2021, the Company and Mr. Vickers extended the maturity date of the note to October 1, 2021. On September 1, 2021, Mr. Vickers converted the outstanding $25,000 in principal and $25,000 in additional consideration in exchange for 50,000 Series A Preferred Shares.

 

On July 22, 2021, the Company issued secured convertible promissory notes in the aggregate principal amount of $1,075,000 in exchange for an aggregate amount of $1,075,000, which secured convertible promissory notes were issued to the Wit Trust, in the amount of $1,000,000, Mr. Johnson in the amount of $50,000, and Mr. Pino in the amount of $25,000. The secured convertible promissory notes accrued interest at eight percent (8%) per annum and had a maturity date of (i) April 1, 2022, or October 1, 2021. On August 18, 2021, Mr. Pino converted the outstanding $25,000 in principal in exchange for 25,000 Series A Preferred Shares. On September 7, 2021, Mr. Johnson converted the outstanding $50,000 in principal in exchange for 50,000 Series A Preferred Shares. On September 30, 2021 the Wit Trust converted the outstanding $1,000,000 in principal in exchange for 1,000,000 Series A Preferred Shares.

 

On August 30, 2021, the Company issued a secured convertible promissory note in the aggregate principal amount of $500,000 to the Wit Trust. The note carried an interest rate of eight percent (8%) per annum and had a maturity date of April 1, 2022. On September 30, 2021, the Wit Trust converted the outstanding $500,000 in principal in exchange for 500,000 Series A Preferred Shares.

 

On September 30, 2021, the Company completed the 2021 Private Placement which commenced on August 5, 2021 of Series A Preferred Shares to certain investors, pursuant to which the Company sold an aggregate of 2,000,000 Series A Preferred Shares at a purchase price of $1.00 per share in exchange for (i) the payment of $1,860,000 (including $1,644,068.49 principal plus accrued but unpaid interest in bridge financing provided by certain investors during April, July and August 2021 upon the conversion of the investors’ secured convertible promissory notes, and the conversion of an account payable); and (ii) the surrender of 280,000 Units. The investors in the 2021 Private Placement included: Mr. Johnson upon the conversion of $50,000 promissory note; Mr. Pino upon the conversion of $25,000 promissory note; Mr. Vickers upon conversion of $50,000 promissory note and accounts payable; Dr. van der Post, a member of the Board of Directors of the Company, in the amount of $50,000, and; the Wit Trust, in the amount of $65,931.51 and upon conversion of $1,500,000 secured convertible promissory notes and $19,068.49 in accrued and unpaid interest. As a result of the 2021 Private Placement and the voting rights accorded the Series A Preferred Shares and Series B Preferred Shares, the Wit Trust holds approximately eighty eight percent (88%) of the voting power of the Company.

 

20

 

 

Veritas Farms, Inc. and Subsidiary

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

On October 12, 2021, the Company issued a secured convertible credit line promissory note in the principal amount for up to $1,500,000 which Secured Convertible Promissory Note was issued to the Wit Trust. On March 9, 2022, the Company amended the Secured Convertible Promissory Note originally dated October 12, 2021 to increase the total available principal balance to $3,000,000. The Secured Convertible Promissory Note is secured by the Company’s assets and contain certain non-financial covenants and customary events of default, the occurrence of which could result in an acceleration of the Secured Convertible Promissory Note. The Secured Convertible Promissory Note is convertible as follows: aggregate outstanding loaned principal and accrued interest under the Secured Convertible Promissory Note may, at the option of the holder, be converted in its entirety into shares of our common stock at a conversion price of $0.05 per share. The Secured Convertible Promissory Note will accrue interest on the aggregate amount loaned at a rate of ten percent (10%) per annum. All unpaid principal, together with any then unpaid and accrued interest and other amounts payable under the Secured Convertible Promissory Note, is due and payable if not converted pursuant to the terms and conditions of the Secured Convertible Promissory Note on the earlier of (i) October 1, 2024, or (ii) following an event of default. The Company determined that there was a beneficial conversion feature of $475,000 relating to this note which is being amortized over the life of the note, using the using the effective interest method. The note is presented net of a discount of $320,952 on the accompanying balance sheet with amortization to interest expense of $120,357 and $0 for the nine month periods ended September 30, 2022 and September 30, 2021, respectively. At September 30, 2022, $3,000,000 was outstanding on the Secured Convertible Promissory Note.

 

On August 2, 2022, the Company issued a secured convertible promissory note in the principal amount of $250,000 to the Wit Trust in exchange for $250,000. The note carries an interest rate of ten percent (10%) per annum and has a maturity date of October 1, 2024.

 

On August 17, 2022, the Company issued a secured convertible promissory note in the principal amount of $250,000 to the Wit Trust in exchange for $250,000. The note carries an interest rate of ten percent (10%) per annum and has a maturity date of October 1, 2024.

 

On September 6, 2022, the Company issued a secured convertible promissory note in the principal amount of $250,000 to the Wit Trust in exchange for $250,000. The note carries an interest rate of ten percent (10%) per annum and has a maturity date of October 1, 2024.

 

The secured convertible promissory notes issued in August and September 2022 are secured by the Company’s assets and contains certain non-financial covenants and customary events of default, the occurrence of which could result in an acceleration of the secured convertible promissory notes. These secured convertible promissory notes are convertible into Conversion Securities as described in Note 5 above.

 

For the nine month period ended September 30, 2022 we incurred $288,782 in interest expense payable to related parties and $21,754 in interest expense payable to related parties for the nine month period ended September 30, 2021. For the three month period ended September 30, 2022 we incurred $123,955 in interest expense payable to related parties and $20,093 in interest expense payable to related parties for the three month period ended September 30, 2021.

 

NOTE 11: COMMITMENTS AND CONTINGENCIES

 

Legal Matters and Routine Proceedings

 

As of September 30, 2022, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect on the results of our operations.

 

From time to time, the Company may be involved in and subject to disputes and legal proceedings, as well as demands, claims and threatened litigation that arise in the ordinary course of its business. These proceedings may include allegations involving business practices, infringement of intellectual property, employment or other matters. The ultimate outcome of any legal proceeding is often uncertain, there can be no assurance that the Company will be successful in any legal proceeding, and unfavorable outcomes could have a negative impact on our results of operations and financial condition. The Company records a liability in its financial statements for these matters when a loss is known or considered probable and the amount can be reasonably estimated. The Company reviews the status of each significant matter each accounting period as additional information is known and adjusts the loss provision when appropriate. If a matter is both probable to result in a liability and the amounts of loss can be reasonably estimated, the Company estimates and discloses the possible loss or range of loss to the extent necessary to make the financial statements not misleading. If the loss is not probable or cannot be reasonably estimated, a liability is not recorded in the Company’s financial statements. Gain contingencies are not recorded until they are realized. Legal costs related to any legal matters are expensed as incurred

 

Employment Agreements

 

We have employment agreements in place with the following members of our executive management team:

 

Ramon A. Pino, Chief Financial Officer

 

The employment agreements provide, among other things, for participation in employee benefits available to employees and executives. Each of the agreements will renew for successive one-year terms unless the agreement is expressly terminated by either the employee or the Company prior to the end of the then current term as provided for in the employment agreement. Under the terms of the agreement, we may terminate the employee’s employment upon 30 or 60 days notice of a material breach and the employee may terminate the agreement under the same terms and conditions. The employment agreements contain non-disclosure provisions, as well as non-compete clauses. The agreement for Mr. Pino contains severance provisions which entitles the employee to severance pay equal to one (1) year’s salary and benefits in the event of (i) the employee’s termination by the Company for any reason other than for cause, as described in the employment agreement, (ii) termination by the employee pursuant to a material breach of the agreement by the Company or for good reason in connection with a change of control, or (iii) non-renewal of the employment agreement by the Company.

  

NOTE 12: SUBSEQUENT EVENTS

 

On October 11, 2022, the Company issued a secured convertible promissory note in the principal amount of $250,000 to the Wit Trust in exchange for $250,000. The note carries an interest rate of ten percent (10%) per annum and has a maturity date of October 1, 2024. The secured convertible promissory note is secured by the Company’s assets and contains certain non-financial covenants and customary events of default, the occurrence of which could result in an acceleration of the secured convertible promissory note. The secured convertible promissory note is convertible into Conversion Securities as described in Note 5 above.

 

On November 7, 2022, the Board of Directors of the Company appointed Mr. Vickers to serve as the Company’s Interim Chief Executive Officer to assume the duties of principal executive officer effective November 7, 2022. The Company’s former Chief Executive Officer, Alessandro M. Annoscia, stepped down as Chief Executive Officer, President, and a director of the Company, and from any and all other positions he holds with the Company and its subsidiary as of November 7, 2022.

 

21

 

 

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,” “Veritas Farms,” “Veritas,” “we,” “us” and “our” refer to Veritas Farms, Inc. and its subsidiary.

 

Forward-Looking Statements

 

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

 

Business Overview

 

Veritas Farms, Inc. is an agribusiness focused on growing, producing, marketing, and distributing superior quality, whole plant, full spectrum hemp oils and extracts containing naturally occurring phytocannabinoids (collectively, “CBD”). Veritas Farms owns and operates a 140 acre farm in Pueblo, Colorado, capable of producing over 200,000 proprietary full spectrum hemp plants which can potentially yield a minimum annual harvest of 250,000 to 300,000 pounds of outdoor-grown industrial hemp. While part of the cannabis family, hemp, which contains less than 0.3% tetrahydrocannabinol (“THC”), the psychoactive compound that produces the “high” in marijuana, is distinguished from marijuana by its use, physical appearance and lower THC concentration (marijuana generally has a THC level of 10% or more). The Company also operates approximately 15,000 square feet of climate-controlled greenhouses to produce a consistent supply of year-round indoor-cultivated hemp. In addition, there is a 10,000 square foot onsite facility used for processing raw hemp, oil extraction, formulation laboratories and quality/purity testing. Veritas Farms is registered with the Colorado Department of Agriculture to grow industrial hemp and with the Colorado Department of Public Health and Environment to process hemp and manufacture hemp products in accordance with Colorado’s hemp program. The Company primarily conducts its business operations through its wholly-owned subsidiary, 271 Lake Davis Holdings, LLC, a Delaware limited liability company.

 

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

 

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

 

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Veritas Farms products (50+ SKUs) include capsules, gummies, tinctures, lotions, salves, creams, balm sticks, lip balms and pet chews. All product applications come in various flavors and strength formulations, in addition to bulk volume sales. Many of the Company’s whole-plant hemp oil products and formulations are available for purchase online directly from the Company through its Veritas Farms website, www.TheVeritasFarms.com, as well as through other online retailers and “brick and mortar” retail outlets.

 

The branding of the Company’s line of hemp oil and extract products has enabled market penetration during 2021 and 2022 into large retail chains increasing brand exposure and awareness. The initial rollouts have been successful in creating distribution opportunities into thousands of new retail outlets across the country (over 8,000 retail outlets as of the date of this report). The shift from smaller order fulfilment to larger “Big Box” orders creates an economy of scale that offers the opportunity for the Company to achieve profitability.

 

Recent Developments

 

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Management Changes

 

On June 30, 2022, Dave Smith notified the Company of his resignation as Chief Operating Officer of the Company effective June 30, 2022.

 

On July 25, 2022, the Board of Directors of the Company appointed Alessandro M. Annoscia to serve as the Company’s Chief Executive Officer and President to assume the duties of principal executive officer and as a Board member effective July 25, 2022. The Company’s former Chief Executive Officer, Stephen E. Johnson, stepped down as Chief Executive Officer, President, and a director of the Company, and from any and all other positions he holds with the Company and its subsidiary as of July 25, 2022.

 

On November 7, 2022, the Board of Directors of the Company appointed our Chairman of the Board, Thomas E. Vickers to serve as the Company’s Interim Chief Executive Officer to assume the duties of principal executive officer effective November 7, 2022. The Company’s former Chief Executive Officer, Alessandro M. Annoscia, stepped down as Chief Executive Officer, President, and a director of the Company, and from any and all other positions he holds with the Company and its subsidiary as of November 7, 2022.

 

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. on October 13, 2017. On January 31, 2019, the Company changed its name from SanSal Wellness Holdings, Inc. to Veritas Farms, Inc.

 

Our executive offices are located at 1815 Griffin Road, Suite 401, Dania Beach, FL 33004 and our telephone number is (833) 691-4367. The Company’s year-end is December 31. Our corporate website is www.TheVeritasFarms.com. Information appearing on our website is not part of this Quarterly Report on Form 10-Q.

 

Results of Operations

 

The nine months ended September 30, 2022 compared to the nine months ended September 30, 2021

 

Revenues. Revenues for the nine months ended September 30, 2022 decreased to $948,046, as compared to revenues of $2,007,616 for the nine months ended September 30, 2021. The decrease reflects a significant contraction of retail sales in 2022 from 2021. Sales include bulk oils for wholesale, capsules, gummies, tinctures, lotions, salves, creams, balm sticks, lip balms and pet chews, all in various potency levels and flavors.

 

Cost of goods sold. All expenses incurred to grow, process, and package the finished goods are included in our cost of goods sold. Cost of goods sold for the nine months ended September 30, 2022 decreased to $1,007,616 from $1,287,505 for the nine months ended September 30, 2021. The decrease in cost of sales can be attributed to the decrease in sales, which was also offset by the disposal of expired and unsaleable finished goods during the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021. 

 

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Gross margin. We had gross expense of $59,570 for the nine months ended September 30, 2022, as compared to gross margin of $716,566 for the nine months ended September 30, 2021. The decrease in gross margin can be attributed to the decrease in sales in addition to the disposal of expired and unsaleable finished goods during the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021.

 

Selling, general and administrative expenses. Selling, general and administrative expenses decreased to $3,282,968 for the nine months ended September 30, 2022, from $4,360,129 for the nine months ended September 30, 2021. The decrease to selling, general and administrative expenses is primarily due to reductions in total salary and related expenses. Selling, general and administrative expenses consist primarily of administrative personnel costs, facilities expenses, professional fee expenses and marketing costs for our Veritas Farms brand products.

 

Other income/(expense). Interest expense for the nine months ended September 30, 2022 was $332,084, as compared to $97,111 for the nine months ended September 30, 2021. Interest expense increased in the nine months ending September 30, 2022 compared to the nine months ending September 30, 2021 due to the interest method amortization of a beneficial conversion feature, in addition to an increase in interest bearing notes payable. We also recorded a loss on lease termination of $0 for the nine months ended September 30, 2022 compared to $244,840 for the nine months ended September 30, 2021.

 

Net loss. As a result of all the foregoing, net loss attributable to common shareholders for the nine months ended September 30, 2022, decreased to $3,167,489 or $0.08 per share based on 41,625,331 weighted average shares outstanding, from $3,381,921 or $0.08 per share for the nine months ended September 30, 2021, based on 43,968,420 weighted average shares outstanding.

 

The three months ended September 30, 2022 compared to the three months ended September 30, 2021

 

Revenues. Revenues for the three months ended September 30, 2022 decreased to $180,408, as compared to revenues of $555,870 for the three months ended September 30, 2021. The decrease reflects a significant contraction of retail sales in 2022 from 2021. Sales include bulk oils for wholesale, capsules, gummies, tinctures, lotions, salves, creams, balm sticks, lip balms and pet chews, all in various potency levels and flavors.

 

Cost of goods sold. All expenses incurred to grow, process, and package the finished goods are included in our cost of goods sold. Cost of goods sold for the three months ended September 30, 2022 increased to $363,975 from $282,117 for the three months ended September 30, 2021. The increase in cost of sales can be attributed to the disposal of expired and unsaleable finished goods during the three months ended September 30, 2022 as compared to the three months ended September 30, 2021. 

 

Gross margin. We had gross expense of $183,567 for the three months ended September 30, 2022, as compared to gross margin of $273,753 for the three months ended September 30, 2021. The decrease in gross margin can be attributed to the decrease in sales in addition to the disposal of expired and unsaleable finished goods during the three months ended September 30, 2022 as compared to the three months ended September 30, 2021.

 

Selling, general and administrative expenses. Selling, general and administrative expenses decreased to $640,241 for the three months ended September 30, 2022, from $1,558,524 for the three months ended September 30, 2021. The decrease to selling, general and administrative expenses is primarily due to reductions in total salary and related expenses. Selling, general and administrative expenses consist primarily of administrative personnel costs, facilities expenses, professional fee expenses and marketing costs for our Veritas Farms brand products.

 

Other income/(expense). Interest expense for the three months ended September 30, 2022 was $134,569, as compared to $34,801 for the three months ended September 30, 2021. Interest expense increased in the three months ending September 30, 2022 compared to the three months ending September 30, 2021 due to the interest method amortization of a beneficial conversion feature, in addition to an increase in interest bearing notes payable.

 

Net loss. As a result of all the foregoing, net loss attributable to common shareholders for the three months ended September 30, 2022, decreased to $1,080,054 or $0.03 per share based on 41,625,331 weighted average shares outstanding, from $1,499,097 or $0.04 per share for the three months ended September 30, 2021, based on 41,974,977 weighted average shares outstanding.

 

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Liquidity and Capital Resources

 

Liquidity is the ability of a company to generate adequate amounts of cash to meet its needs for cash. We have historically experienced negative cash flows and have relied on the proceeds from the sale of debt and equity securities to fund our operations. In addition, we have utilized stock-based compensation as a means of paying for consulting and salary related expenses. At September 30, 2022, we had working capital of approximately $1,663,145.

 

Cash decreased to $124,749 at September 30, 2022 from $481,763 at December 31, 2021. The decrease was primarily due to net cash used in operating activities.

 

As of September 30, 2022, total assets were $8,348,528 as compared to $8,597,840 at December 31, 2021. The decrease in assets is primarily due to a decrease in cash and property and equipment, net of accumulated depreciation.

 

Total current liabilities as of September 30, 2022 were $2,862,606, as compared to $2,209,096 at December 31, 2021. The increase was mainly due to increases in dividends payable and deferred revenue.

 

Net cash used in operating activities was $3,297,146 for the nine months ended September 30, 2022, as compared to $4,286,248 for the nine months ended September 30, 2021. The decrease is largely attributable to the increase in net loss attributable to common shareholders, and by changes in inventories, accounts payable, employee retention credit receivable and deferred revenue. 

 

Net cash provided by investing activities was $23,621 for the nine months ended September 30, 2022 as compared to net cash used of $53,898 for the nine months ended September 30, 2021, reflecting a decrease in capital expenditures in 2022.

 

Net cash provided by financing activities was $2,916,511 for the nine months ended September 30, 2022 as compared to $4,474,749 for the nine months ended September 30, 2021. Net cash provided by financing activities for the nine months ended September 30, 2022 included net proceeds of $3,000,000 from convertible note payables received from the Wit Trust. Net cash provided by financing activities for the nine months ended September 30, 2021 included net proceeds of $803,994 from a loan received under the U.S. Small Business Administration Paycheck Protection Program as part of the business incentives offered in the Coronavirus Aid, Relief, and Economic Security Act received in February 2021, net proceeds of $86,895 from private offerings of our equity securities and $3,665,440 from initial closings under private placements.

 

Contractual Obligations

 

The following table sets forth our contractual obligations as of September 30, 2022:

 

  Payments due by period 
Contractual obligation  Total   Less than
1 year		   1-2 Years   2-3 Years   3+ Years 
Promissory notes(1)  $164,939   $17,567   $3,264   $3,389   $140,719 
Convertible notes(1)   3,950,000    200,000(2)   -    3,750,000(3)   - 
Operating lease obligations(4)   295,076    149,900    113,309    31,867    - 
Total  $4,410,015   $367,467   $116,573   $3,785,256   $140,719 

 

(1)Amounts do not include interest to be paid.
(2)Includes $200,000 of 10% convertible notes payable that mature in October 2022.
(3)Includes $3,750,000 of 10% convertible notes payable that mature in October 2024.
(4)Includes office lease obligations for our executive office in Florida and our warehouse facilities in Colorado.

 

Sources of Liquidity and Capital Resources; Debt Obligations

 

Our primary sources of capital to develop and implement our business plan and expand our operations have been the proceeds from private offerings of our debt and equity securities and notes payable.

 

In March 2020, the Company received a $200,000 loan from a single investor, evidenced by a one-year convertible promissory note (“Convertible Note”). The Convertible Note bears interest at the rate of ten percent (10%) per annum, which accrues and is payable together with principal at maturity. Principal and accrued interest under the Convertible Note may, at the option of the holder, be converted in its entirety into shares of our common stock at a conversion price of $0.40 per share, subject to adjustment for stock splits, stock dividends and similar recapitalization transactions. On May 14, 2021, the Company paid $20,000 in accrued interest to the holder, and the Company and the investor extended the maturity date of the Convertible Note to September 6, 2021. In September 2021, the Company and the investor further extended the maturity date of the Convertible Note to October 1, 2022.

 

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In September 2020, the Company commenced a $4.0 million private offering of up to 8,000,000 Units at a price of $0.50 per Unit, which private offering ended April 30, 2021. Each Unit consists of (a) two shares of common stock; and (b) one warrant, entitling the holder to purchase one share of our common stock at an exercise price of $0.50 at any time through August 31, 2025. As of December 31, 2020, the Company sold 2,080,000 Units in the private offering for gross proceeds of $1,040,000 with offering costs of $154,965 resulting in net proceeds of $885,035. From January 1, 2021 through April 30, 2021, the Company sold an additional 200,000 Units for gross proceeds of $100,000 with offering costs of $13,105 resulting in net proceeds of $86,895. The terms of this offering provided that, if during the one-year period from the final closing of the offering, the Company undertakes a subsequent private offering of its equity, equity equivalent or debt securities (a “Subsequent Offering”), the investor will be entitled to exchange their Units purchased in the offering for an equivalent dollar amount of securities sold in the Subsequent Offering (based on the respective offering prices). The Company also entered into a registration rights agreement with the investors which states, among other things, that the Company shall use commercially reasonable efforts to prepare and file with the Securities and Exchange Commission (“SEC”) a registration statement covering, among other things, the resale of all or such portion of the registrable securities that are not then registered on an effective registration statement. As of September 30, 2021, all Unit holders converted their Units into Series A Preferred Shares.

 

On May 11, 2021, the Company consummated the issuance and sale of the Preferred Shares to the Wit Trust described under “Recent Developments” above, which generated gross proceeds of $2,000,000 (including certain bridge financing previously furnished by the Wit Trust to the Company in April 2021).

 

On September 30, 2021, the Company completed the 2021 Private Placement which commenced on August 5, 2021 of Series A Preferred Shares to certain investors, pursuant to which the Company sold an aggregate of 2,000,000 Series A Preferred Shares at a purchase price of $1.00 per share in exchange for (i) the payment of $1,860,000 (including $1,644,068.49 principal plus accrued but unpaid interest in bridge financing provided by certain investors during April, July and August 2021 upon the conversion of the investors’ secured convertible promissory notes, and the conversion of an account payable); and (ii) the surrender of 280,000 Units. The investors in the 2021 Private Placement included: Mr. Johnson upon the conversion of $50,000 promissory note; Mr. Pino upon the conversion of $25,000 promissory note; Mr. Vickers upon conversion of $50,000 promissory note and accounts payable; Dr. van der Post in the amount of $50,000, and; the Wit Trust, in the amount of $65,931.51 and upon conversion of $1,500,000 secured convertible promissory notes and $19,068.49 in accrued and unpaid interest. As a result of the 2021 Private Placement and the voting rights accorded the Series A Preferred Shares and Series B Preferred Shares, the Wit Trust holds approximately eighty eight percent (88%) of the voting power of the Company.

 

On October 12, 2021, the Company issued a secured convertible credit line promissory note in the principal amount for up to $1,500,000 (“Secured Convertible Promissory Note”), which Secured Convertible Promissory Note was issued to the Wit Trust. On March 9, 2022, the Company amended the Secured Convertible Promissory Note originally dated October 12, 2021 to increase the total available principal balance to $3,000,000. The Secured Convertible Promissory Note is secured by the Company’s assets and contain certain non-financial covenants and customary events of default, the occurrence of which could result in an acceleration of the Secured Convertible Promissory Note. The Secured Convertible Promissory Note is convertible as follows: aggregate outstanding loaned principal and accrued interest under the Secured Convertible Promissory Note may, at the option of the holder, be converted in its entirety into shares of our common stock at a conversion price of $0.05 per share. The Secured Convertible Promissory Note will accrue interest on the aggregate amount outstanding at a rate of ten percent (10%) per annum. All unpaid principal, together with any then unpaid and accrued interest and other amounts payable under the Secured Convertible Promissory Note, is due and payable, if not converted pursuant to the terms and conditions of the Secured Convertible Promissory Note on the earlier of (i) October 1, 2024, or (ii) following an event of default. The Company determined that there was a beneficial conversion feature of $475,000 relating to this note which is being amortized over the life of the note, using the using the effective interest method. The note is presented net of a discount of $320,952 on the Company’s balance sheet with amortization to interest expense of $120,357 and $0 for the nine month periods ended September 30, 2022 and September 30, 2021, respectively. At September 30, 2022, $3,000,000 was outstanding on the Secured Convertible Promissory Note.

 

On August 2, 2022, the Company issued a secured convertible promissory note in the principal amount of $250,000 to the Wit Trust in exchange for $250,000. The note carries an interest rate of ten percent (10%) per annum and has a maturity date of October 1, 2024.

 

On August 17, 2022, the Company issued a secured convertible promissory note in the principal amount of $250,000 to the Wit Trust in exchange for $250,000. The note carries an interest rate of ten percent (10%) per annum and has a maturity date of October 1, 2024.

 

On September 6, 2022, the Company issued a secured convertible promissory note in the principal amount of $250,000 to the Wit Trust in exchange for $250,000. The note carries an interest rate of ten percent (10%) per annum and has a maturity date of October 1, 2024.

 

The accompanying financial statements have been prepared in conformity with U.S. GAAP, 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 September 30, 2022, the Company had an accumulated deficit of $37,098,203 and a net loss attributable to common shareholders of $3,167,489. 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 until we can achieve a level of operational profitability, though there is no assurance of success.

 

The Company believes that it will require additional financing to fund its growth and achieve profitability The Company anticipates that such financing will be generated from subsequent private offerings of its equity and/or debt securities. While we believe additional financing will be available to us as needed, there can be no assurance that such 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.

 

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Capital Expenditures

 

Any amounts expended for capital expenditures would be the result of an increase in the capacity needed to adequately service any increase in our business. To date we have paid for any needed additions to our capital equipment infrastructure from working capital funds and anticipate this being the case in the future.

 

Presently, we have approximately $20,000 planned for capital expenditures to further develop the Company’s infrastructure to allow for growth in our operations over the next 12 months. We expect to fund these capital expenditure needs through a combination of vendor provided financing, the use of operating or capital equipment leases and cash provided from operations.

 

Factors Affecting Future Performance

 

Item 1A of our 2021 Form 10-K sets forth risks and uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this report. If any of these risks, or any risks not presently known to us or that we currently believe are not significant, develops into an actual event, then our business, financial condition, and results of operations could be adversely affected.

 

Effects of the Coronavirus (COVID-19) Pandemic on the Company

 

The COVID-19 pandemic has been a disruptive economic and societal event that has affected our business and customers. As this crisis unfolded, we monitored conditions closely and adapted aspects of our business accordingly to meet federal, state, and local standards and to ensure the safety and well-being of our team members, while continuing to meet the needs of our customers. We continue to monitor the impact of the COVID-19 pandemic and adapt our business accordingly.

 

The adverse public health developments and economic effects of the COVID-19 pandemic in the United States has adversely affect the Company’s business and operations, including its customers and suppliers as a result of quarantines, facility closures, closing of “brick and mortar” retail outlets and logistics restrictions imposed or which otherwise occurred in connection with the pandemic. More broadly, the high degree unemployment resulting from the pandemic has, and could potentially continue to lead to an extended economic downturn, which would likely decrease spending, adversely affect demand for our products and services and harm our business, results of operations and financial condition. In addition, global supply chain shortages and disruptions and inflation have emerged, which have impacted, and continue to impact, sales, margins and the pace of economic recovery.

 

While conditions do appear to be improving as vaccination levels rise and state and local economies have, for the most part, re-opened, the broader implications of the COVID-19 pandemic and related global economic unpredictability on our business, financial condition, and results of operations remain uncertain, particularly as vaccine efforts face challenges and new variants of the virus continue to emerge. At this time, we are still unable to accurately predict the duration of the COVID-19 pandemic and the ultimate effect it will have on the broader economy or the operations and liquidity of the Company. As such, risks and uncertainties regarding COVID-19 remain. Please refer to the section titled “Risk Factors” in Item 1A of our 10-K Report.

 

Critical Accounting Policies

 

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and our discussion and analysis of our financial condition and operating results require our management to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. Note 1: Nature of Business and Summary of Significant Accounting Policies of the Notes to our unaudited condensed consolidated financial statements appearing elsewhere in this report describes the significant accounting policies and methods used in the preparation of our unaudited condensed consolidated financial statements. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates, and such differences may be material.

 

Please see Part II, Item 7 – Critical Accounting Policies appearing in our 2021 10-K for the critical accounting policies we believe involve the more significant judgments and estimates used in the preparation of our consolidated financial statements and are the most critical to aid you in fully understanding and evaluating our reported financial results. Management considers these policies critical because they are both important to the portrayal of our financial condition and operating results, and they require management to make judgments and estimates about inherently uncertain matters.

 

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Item 3. Quantitative and Qualitative 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

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, (“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 our management, including our Principal Executive Officer and Principal Financial and Accounting Officer, as appropriate, to allow timely decisions regarding required financial disclosure.

 

Internal control over financial reporting is a process designed by, or under the supervision of, our Chief Executive Officer (our Principal Executive Officer) and our Chief Financial Officer (our Principal Financial and Accounting Officer), to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. GAAP. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of our Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of our unaudited condensed consolidated financial statements in accordance with U.S. GAAP, and that receipts and expenditures of our Company are being made only in accordance with authorizations of management and directors of our Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our Company’s assets that could have a material effect on our unaudited condensed consolidated financial statements. Because of its inherent limitations, internal control over financial reporting may not provide absolute assurance that a misstatement of our unaudited condensed consolidated financial statements would be prevented or detected.

 

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Further, the evaluation of the effectiveness of internal control over financial reporting was made as of a specific date, and continued effectiveness in future periods is subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Our Chief Executive Officer (our Principal Executive Officer) and our Chief Financial Officer (our Principal Financial and Accounting Officer) conducted an evaluation of the effectiveness of our internal control over financial reporting as of September 30, 2022 in accordance with the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission Internal Control — Integrated Framework (2013). Based on this assessment, our Chief Executive Officer (our Principal Executive Officer) and our Chief Financial Officer (our Principal Financial and Accounting Officer) identified the following two material weaknesses that have caused management to conclude that, as of September 30, 2022, our disclosure controls and procedures, and our internal control over financial reporting, were not effective at the reasonable assurance level in that:

 

(a)We do not have written documentation of our internal control policies and procedures. Our Chief Executive Officer and our Chief Financial 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. Documentation of our controls and the continued changes to assure segregation of duties are being performed. Our Chief Executive Officer and our Chief Financial 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 and our Chief Financial Officer performed additional analyses and other procedures to ensure that our unaudited condensed consolidated financial statements included in this report fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented. Accordingly, we believe that our unaudited condensed 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. We intend to take further steps to rectify these material weaknesses, subject to the availability of working capital to fund the costs thereof.

 

Changes in Internal Control Over Financial Reporting

 

There have been no changes in our internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act, during the quarter ended September 30, 2022 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

 

As a result of COVID-19, our workforce continued to operate primarily in a work from home environment for the quarter ended September 30, 2022 and we are monitoring our control environment with increased vigilance to ensure changes as a result of our employees working remotely are addressed and all increased risks are mitigated.

 

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PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

There is no material legal proceeding, arbitration or governmental proceeding currently pending against us or any members of our management team in their capacity as such. From time to time, we may become party to litigation or other legal proceedings that we consider to be a part of the ordinary course of our business. 

 

Item 1A. Risk Factors.

 

The business, financial condition and operating results of the Company can be affected by a number of factors, whether currently known or unknown, including but not limited to those described in Part I, Item 1A of the 2021 Form 10-K, under the heading “Risk Factors,” any one or more of which could, directly or indirectly, cause the Company’s actual financial condition and operating results to vary materially from past, or from anticipated future, financial condition and operating results. Any of these factors, in whole or in part, could materially and adversely affect the Company’s business, financial condition, operating results and stock price. There have been no material changes to the Company’s risk factors since the 2021 Form 10-K.

 

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

 

None.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

None.

 

Item 6. Exhibits.

 

Exhibit
Number		   Description of Exhibit
4.6*   Form of Secured Convertible Promissory Note and Schedule of Substantially Identical Secured Convertible Promissory Notes
     
31.1*   Section 302 Certification of CEO pursuant to Rules 13a - 14(a) or Rule 15d - 14(a) under the Exchange Act
     
31.2*   Section 302 Certification of CFO pursuant to Rule 13a-14(a) or Rules 15d - 14(a) under the Exchange Act
     
32.1**   Section 906 Certification of CEO and CFO pursuant to Rules 13a - 14(b) or 15d - 14(b) under the Exchange Act and 18 USC 1350
     
101.INS*   Inline XBRL Instance Document
     
101.SCH*   Inline XBRL Taxonomy Extension Schema Document
     
101.CAL*   Inline XBRL Taxonomy Extension Calculation Linkbase Document
     
101.DEF*   Inline XBRL Taxonomy Extension Definition Linkbase Document
     
101.LAB*   Inline XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE*   Inline XBRL Taxonomy Extension Presentation Linkbase Document
     
104   Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

* Filed herewith

** Furnished herewith

 

31

 

 

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.

 

  VERITAS FARMS, INC.
   
Dated: November 14, 2022 By: /s/ Thomas E. Vickers
    Thomas E. Vickers,
Interim Chief Executive Officer
    (Principal Executive Officer)
     
Dated: November 14, 2022 By: /s/ Ramon A. Pino
    Ramon A. Pino,
Chief Financial Officer
    (Principal Financial and Accounting Officer)

 

 

31

 

 

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