The Accompanying Notes Are an Integral Part of These Consolidated
Financial Statements
The Accompanying Notes Are an Integral Part of These Consolidated
Financial Statements
The Accompanying Notes Are an Integral Part of These Consolidated
Financial Statements
The Accompanying Notes Are an Integral Part of These Consolidated
Financial Statements
The Accompanying Notes Are an Integral Part of These Consolidated
Financial Statements
Notes to Consolidated Financial Statements
NOTE 1:
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
Veritas Farms, Inc. (the “Company”),
was incorporated as Armeau Brands Inc. in the State of Nevada on March 15, 2011. On October 13, 2017, the Company filed Amended
and Restated Articles of Incorporation with the Nevada Secretary of State changing the name from “Armeau Brands Inc.”
to “SanSal Wellness Holdings, Inc.” Effective February 5, 2019, the Company changed its name from “SanSal Wellness
Holdings, Inc.” to “Veritas Farms, Inc.” The Company’s business objectives are to produce natural rich-hemp
products, using strict natural protocols and materials yielding broad spectrum phytocannabinoid rich hemp oils, distillates and
isolates. The Company is licensed by the Colorado Department of Agriculture to grow industrial hemp pursuant to Federal law on
its farm.
Effective September 27, 2017, the Company
acquired 100% of the issued and outstanding limited liability company membership interests of 271 Lake Davis Holdings LLC dba SanSal
Wellness (“271 Lake Davis”) in exchange for 11,700,000 (46,800,000 prior to reverse split) restricted shares of the
Company’s common stock, which represented 100% of 271 Lake Davis’s total membership interests outstanding immediately
following the closing of the transaction. The transaction has been accounted for as a reverse merger, whereby 271 Lake Davis is
the accounting survivor and the historical financial statements presented are those of 271 Lake Davis.
Basis of Presentation
The accompanying unaudited consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.
(“U.S. GAAP”).
Principles of Consolidation
The accompanying consolidated financial
statements reflect the accounts of Veritas Farms, Inc. and 271 Lake Davis Holdings and its wholly owned subsidiary, SanSal, LLC.
All significant inter-company accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements
in conformity with accounting principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect certain reported amounts and disclosures. Actual results could differ from these estimates.
Veritas Farms, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 1:
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair Value Measurement
The Company has adopted the provisions
of ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value as used in numerous accounting pronouncements,
establishes a framework for measuring fair value and expands disclosure of fair value measurements.
The estimated fair value of certain financial
instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued expenses are carried at historical
cost basis, which approximates their fair values because of the short-term nature of these instruments. The carrying amounts of
the Company’s short and long-term credit obligations approximate fair value because the effective yields on these obligations,
which include contractual interest rates taken together with other features such as concurrent issuances of warrants and/or embedded
conversion options, are comparable to rates of returns for instruments of similar credit risk.
ASC 820 defines fair value as the exchange
price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes
a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:
Level 1 – quoted
prices in active markets for identical assets or liabilities
Level 2 – quoted prices
for similar assets and liabilities in active markets or inputs that are observable
Level 3 – inputs that
are unobservable (for example cash flow modeling inputs based on assumptions)
The Company does not have any assets or
liabilities measured at fair value on a recurring basis.
Cash and Cash Equivalents
The Company considers all highly liquid
investments with an original maturity of three months or less to be cash equivalents. At times, cash and cash equivalents may be
in excess of FDIC insurance limits.
Revenue Recognition
In May 2014, the FASB issued
Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes all
existing revenue recognition requirements, including most industry specific guidance. This new standard requires a company to
recognize revenues when it transfers goods or services to customers in an amount that reflects the consideration that the
company expects to receive for those goods or services. The FASB subsequently issued the following amendments to ASU No.
2014-09 that have the same effective date and transition date: ASU No. 2016-08, Revenue from Contracts with Customers (Topic
606): Principal versus Agent Considerations; ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying
Performance Obligations and Licensing; ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope
Improvements and Practical Expedients; and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from
Contracts with Customers. The Company adopted these amendments with ASU 2014-09 (collectively, the new revenue
standards).
Veritas Farms, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 1:
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The new revenue standards became effective
for the Company on January 1, 2018 and were adopted using the modified retrospective method. The adoption of the new revenue standards
as of January 1, 2018 did not change the Company’s revenue recognition as the majority of its revenues continue to be recognized
when the customer takes control of its product. As the Company did not identify any accounting changes that impacted the amount
of reported revenues with respect to its product revenues, no adjustment to retained earnings was required upon adoption.
Under the new revenue standards, the Company
recognizes revenues when its customer obtains control of promised goods or services, in an amount that reflects the consideration
which it expects to receive in exchange for those goods. The Company recognizes revenues following the five-step model prescribed
under ASU No. 2014-09: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii)
determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize
revenues when (or as) we satisfy the performance obligation.
Revenues from product sales are recognized
when the customer obtains control of the Company’s product, which occurs at a point in time, typically upon delivery to the
customer. The Company expenses incremental costs of obtaining a contract as and when incurred if the expected amortization period
of the asset that it would have recognized is one year or less or the amount is immaterial.
Cost of Goods Sold
Hemp Cultivation and Production
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.
Veritas Farms, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 1:
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property, Plant and Equipment
Purchase of property, plant and equipment
are recorded at cost. Improvements and replacements of property, plant and equipment are capitalized. Maintenance and repairs that
do not improve or extend the lives of property and equipment are charged to expense as incurred. When assets are sold or retired,
their cost and related accumulated depreciation are removed from the accounts and any gain or loss is reported in the Consolidated
Statements of Operations. Depreciation is provided over the estimated economic useful lives of each class of assets and is
computed using the straight-line method.
Impairment of Long-Lived Assets
The carrying value of long-lived assets
are reviewed when facts and circumstances suggest that the assets may be impaired or that the amortization period may need to be
changed. The Company considers internal and external factors relating to each asset, including cash flows, local market developments,
industry trends and other publicly available information. If these factors and the projected undiscounted cash flows of the Company
over the remaining amortization period indicate that the asset will not be recoverable, the carrying value will be adjusted to
the fair market value. The Company has determined that no impairment exists at December 31, 2019 and December 31, 2018.
Compensation and Benefits
The Company records compensation and benefits
expense for all cash and deferred compensation, benefits, and related taxes as earned by its employees. Compensation and benefits
expense also includes compensation earned by temporary employees and contractors who perform similar services to those performed
by the Company’s employees.
Stock-Based Compensation
The Company accounts for share-based payments
in accordance with ASC 718, “Compensation - Stock Compensation,” which requires all share-based payments to employees,
including grants of employee stock options, to be recognized in the financial statements based on the grant date fair value of
the award. In accordance with ASC 718-10-30-9, “Measurement Objective – Fair Value at Grant Date,” the Company
estimates the fair value of the award using the Black-Scholes option pricing model for valuation of the share- based payments.
The Company believes this model provides the best estimate of fair value due to its ability to incorporate inputs that change over
time, such as volatility and interest rates, and to allow for actual exercise behavior of option holders.
The simplified method is used to determine
compensation expense since historical option exercise experience is limited relative to the number of options issued. The compensation
cost is recognized ratably using the straight-line method over the expected vesting period.
The Company accounts for stock-based compensation
to other than employees in accordance with FASB ASC 505-50. Equity instruments issued to other than employees are valued at the
earlier of a commitment date or upon completion of the services, based on the fair value of the equity instruments, and is recognized
as expense over the service period.
Veritas Farms, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 1:
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes
The Company accounts for income taxes under
ASC 740 Income Taxes. Under the asset and liability method of ASC 740, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the financial statements carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period the enactment
occurs. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that the Company
will not realize tax assets through future operations.
In accordance with Financial Accounting
Standards Board ASC Topic 740, Income Taxes, management evaluated the Company’s tax positions and concluded that the Company
had taken no uncertain tax positions that require adjustment to the financial statements to comply with the provisions of this
guidance. The Company is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax
periods in progress.
Income tax benefits are recognized for
income tax positions taken or expected to be taken in a tax return, only when it is determined that the income tax position will
more-likely than-not be sustained upon examination by taxing authorities. The Company has analyzed tax positions taken for filings
with the Internal Revenue Service and all tax jurisdictions where it operates. The Company believes that income tax filing positions
will be sustained upon examination and does not anticipate any adjustments that would result in a material adverse effect on the
Company’s financial condition, results of operations or cash flows. Accordingly, the Company has not recorded any reserves,
or related accruals for interest and penalties for uncertain income tax positions at December 31, 2019 and December 31, 2018.
Leases
The Company has one leased buildings in
Fort Lauderdale, Florida that is classified as operating lease right-of use (“ROU”) assets and operating lease liabilities
in the Company’s consolidated balance sheet. 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 cost of Selling, General and Administrative expenses.
ASC 842 was effective for us beginning January 1, 2019. The Company elected the available practical expedients on adoption.
The adoption had a material impact on our consolidated balance sheets, but did not have a material impact on our consolidated
income statements. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases.
Finance leases are not material to the Company and were not impacted by the adoption of ASC 842, as finance lease liabilities
and the corresponding assets were already recorded in the balance sheet under the previous guidance, ASC 840.
Veritas Farms, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 1:
NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Related Party Transactions
The Company follows FASB ASC subtopic 850-10,
Related Party Disclosures, for the identification of related parties and disclosure of related party transactions. Pursuant to
ASC 850-10-20, related parties include: a) affiliates of the Company; b) entities for which investments in their equity securities
would be required, absent the election of the fair value option under the Fair Value Option Subsection of Section 825–10–15,
to be accounted for by the equity method by the investing entity; c) trusts for the benefit of employees, such as pension and profit-sharing
trusts that are managed by or under the trusteeship of management; d) principal owners of the Company; e) management of the Company;
f) other parties with which the Company may deal if one party controls or can significantly influence the management or operating
policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate
interests; and g) other parties that can significantly influence the management or operating policies of the transacting parties
or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that
one or more of the transacting parties might be prevented from fully pursuing its own separate interests.
The consolidated financial statements shall
include disclosures of related party transactions, other than compensation arrangements, expense allowances, and other similar
items in the ordinary course of business. However, disclosure of transactions that are eliminated in the preparation of consolidated
or combined financial statements is not required in those statements. The disclosures shall include: a) the nature of the relationship(s)
involved; b) a description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for
each of the periods for which statements of operation are presented, and such other information deemed necessary to an understanding
of the effects of the transactions on the financial statements; c) the dollar amounts of transactions for each of the periods for
which statements of operations are presented and the effects of any change in the method of establishing the terms from that used
in the preceding period; and d) amounts due from or to related parties as of the date of each balance sheet presented and, if not
otherwise apparent, the terms and manner of settlement.
Legal Proceedings
Currently there are no material legal proceedings
pending or threatened against the Company. However, from time to time, the Company may become involved in various lawsuits and
legal proceedings which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse
result in any such matter may harm the Company’s business.
Subsequent Events
The Company has evaluated subsequent events
through the date which the financial statements were issued.
Veritas Farms, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 2: INVENTORIES
Inventory consists of:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Inventory
|
|
|
|
|
|
|
|
|
Work In Progress
|
|
$
|
4,062,890
|
|
|
$
|
2,241,554
|
|
Finished Goods
|
|
|
1,983,107
|
|
|
|
72,604
|
|
Other
|
|
|
554,458
|
|
|
|
194,796
|
|
|
|
|
|
|
|
|
|
|
Inventory
|
|
$
|
6,600,455
|
|
|
$
|
2,508,954
|
|
During the periods ending December 31,
2019 and December 31, 2018 the Company realized a loss from destruction of plants in the amounts of $77,387 and $0, respectively.
NOTE 3: GOING CONCERN
The accompanying financial statements have
been prepared in conformity with accounting principles generally accepted in the United States, which contemplate continuation
of the Company as a going concern. However, the Company has sustained substantial losses from operations since its inception. As
of and for the period ended December 31, 2019, the Company had an accumulated deficit of $19,074,608, and a net loss of $11,147,608.
These factors, among others, raise substantial doubt about the ability of the Company to continue as a going concern. Continuation
as a going concern is dependent on the ability to raise additional capital and financing, though there is no assurance of success.
The Company’s rebranded line of hemp
oil and extract product allowed market penetration into large retail chains vastly increasing brand exposure and awareness. The
initial rollouts have been successful creating opportunities for thousands of new retail outlets across the country. The shift
from smaller order fulfillment to larger “big box store” orders creates an economy of scale and increased profitability.
Currently, the Company incorporates an
aggressive marketing plan to compete in the Cannabinoid industry. To become market leaders in the market, the Company will use
three primary departments to market its products including: web-based marketing, traditional marketing, and medical marketing departments.
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 public or private offerings of its equity and/or debt securities. Outside
financing, in concert with increased profitability of "Big Box" retail orders and Ecommerce allow management to conclude that
the Company will continue as a going concern.
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.
Veritas Farms, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 4: PROPERTY AND EQUIPMENT
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
Life
|
|
2019
|
|
|
2018
|
|
PROPERTY AND EQUIPMENT
|
|
|
|
|
|
|
|
|
|
|
Land and Land Improvements
|
|
-
|
|
$
|
398,126
|
|
|
|
398,126
|
|
Building and Improvements
|
|
39
|
|
|
1,510,175
|
|
|
|
1,465,245
|
|
Greenhouse
|
|
39
|
|
|
920,896
|
|
|
|
693,987
|
|
Fencing and Irrigation
|
|
15
|
|
|
203,793
|
|
|
|
203,793
|
|
Machinery and Equipment
|
|
7
|
|
|
2,480,475
|
|
|
|
1,475,644
|
|
Furniture and Fixtures
|
|
7
|
|
|
236,344
|
|
|
|
224,682
|
|
Computer Equipment
|
|
5
|
|
|
20,053
|
|
|
|
20,053
|
|
Vehicles
|
|
5
|
|
|
120,206
|
|
|
|
31,161
|
|
|
|
|
|
$
|
5,890,068
|
|
|
$
|
4,512,691
|
|
Less Accumulated Depreciation
|
|
|
|
|
(976,005
|
)
|
|
|
(580,232
|
)
|
Property and Equipment
|
|
|
|
$
|
4,914,063
|
|
|
|
3,932,459
|
|
Total depreciation expense was $404,346
and $274,195 for the years ended December 31, 2019 and 2018, respectively.
NOTE 5: LONG-TERM DEBT
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Note Payable which requires monthly payments of $1,618 including interest at 6.00% per annum until February 1, 2020 when the balance is due in full. The note is secured by specific assets of the Company.
|
|
$
|
-
|
|
|
$
|
99,902
|
|
|
|
|
|
|
|
|
|
|
Notes Payable which require monthly payments of $3,690, $669, and $1,691, including interest at 5.16% per annum until December 1, 2022, May 1, 2023, and August 1, 2024, when the balance is due in full. The note is secured by specific assets of the Company.
|
|
|
211,952
|
|
|
|
146,791
|
|
|
|
|
|
|
|
|
|
|
Note Payable which require monthly payments of $758, including interest at 3.4% per annum until April 1, 2025, when the balance is due in full. The note is secured by specific assets of the Company.
|
|
|
40,870
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
252,822
|
|
|
|
246,693
|
|
Less Current Portion
|
|
|
(67,996
|
)
|
|
|
(50,432
|
)
|
Long-Term Debt - net of current portion
|
|
$
|
184,826
|
|
|
$
|
196,261
|
|
Veritas Farms, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 5: LONG-TERM DEBT (CONTINUED)
Long-term debt consisted of the following:
Future principal payments are as follows
as of the year ended December 31, 2019:
2020
|
|
$
|
67,996
|
|
2021
|
|
|
67,996
|
|
2022
|
|
|
67,996
|
|
2023
|
|
|
27,299
|
|
2024
|
|
|
18,980
|
|
Thereafter
|
|
|
2,554
|
|
|
|
$
|
252,822
|
|
NOTE 6: STOCK-BASED COMPENSATION
The Company approved their 2017 Incentive
Stock Plan on September 27, 2017 (the “Incentive Plan”) which authorizes the Company to grant or issue non-qualified
stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units and other equity awards
up to a total of 45 million shares. Under the terms of the Incentive Plan, awards may be granted to our employees, directors
or consultants. Awards issued under the Incentive Plan vest as determined by the Board of Directors or any of the Committees appointed
under the Incentive Plan at the time of grant.
The Company’s outstanding stock options
have a 10-year term. Outstanding non-qualified stock options granted to employees and a consultant vest on a case by case basis.
Outstanding incentive stock options issued to employees vest over a three-year period. The incentive stock options granted vest
based solely upon continued employment (“time-based”). The Company’s time-based share awards that vest in their entirety
at the end of three-year periods, time-based share awards where 33.3% of the award vests on each of the three anniversary dates.
Outstanding incentive stock options issued to executives vest partially upon grant date, with the residual vesting over the subsequent
6 or 12 months.
Veritas Farms, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 6: STOCK BASED COMPENSATION
(CONTINUED)
Stock-based compensation expense was as follows:
|
|
Twelve Months Ended
|
|
|
|
December 31:
|
|
|
|
2019
|
|
|
2018
|
|
Non-Qualified Stock Options - Immediate
|
|
$
|
998,603
|
|
|
$
|
251,023
|
|
Incentive Stock Options - Time Bases
|
|
|
1,368,149
|
|
|
|
623,620
|
|
Total Stock-based Compensation Expense
|
|
$
|
2,366,752
|
|
|
$
|
874,643
|
|
Stock option activity was as follows in the periods
ended December 31, 2019 (Post Reverse Split) and December 31, 2018:
|
|
Stock
|
|
|
Weighted- Average
|
|
|
Weighted- Average
|
|
|
|
Options
|
|
|
Exercise
|
|
|
Remaining
|
|
Outstanding at December 31, 2018
|
|
|
2,275,000
|
|
|
$
|
1.06
|
|
|
|
9.30
|
|
Granted
|
|
|
2,043,750
|
|
|
$
|
1.23
|
|
|
|
9.53
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited/Canceled
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding at Dec 31, 2019
|
|
|
4,318,750
|
|
|
$
|
1.14
|
|
|
|
8.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested at Dec 31, 2019
|
|
|
2,448,958
|
|
|
$
|
1.14
|
|
|
|
8.51
|
|
Exercisable at Dec 31, 2019
|
|
|
2,448,958
|
|
|
$
|
1.14
|
|
|
|
8.51
|
|
The Company estimated the fair value of
each stock option on the date of grant using the Black Scholes valuation model with the following assumptions:
Valuation Assumptions
|
|
|
Risk-free interest rate
|
|
2.14% – 2.94%
|
Expected dividend yield
|
|
0%
|
Expected stock price volatility
|
|
105% to 180%
|
Expected life of stock options (in years)
|
|
10
|
NOTE 7: LEASES
We adopted ASC 842 using the modified retrospective
approach, electing the practical expedient that allows us not to restate our comparative periods prior to the adoption of the standard
on January 1, 2019. As such, the disclosures required under ASC 842 are not presented for periods before the date of adoption.
Veritas Farms, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 7: LEASES (CONTINUED)
The Company recognized the following related
to leases in its Consolidated Balance Sheet:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Right of Use Lease Liabilities
|
|
|
|
|
|
|
|
|
Current portion
|
|
$
|
80,046
|
|
|
$
|
-
|
|
Long-term portion
|
|
|
52,798
|
|
|
|
-
|
|
|
|
$
|
132,844
|
|
|
$
|
-
|
|
On January 15, 2017, the Company entered
an agreement with Pueblo, CO Board of Water Works to lease water for the Company’s cultivation process. The agreement went
into effect as of November 1, 2016 with a term of 10 years expiring on October 31, 2026, with an option to extend the lease upon
expiration for 10 additional years. This agreement replaced previously entered agreements with Pueblo, CO Board of Water Works.
The lease requires annual non-refundable minimum service fees of $15,000 and a usage charge of $1,063 per acre for 30 acres. The
minimum service fees and usage charges are subject to escalators for each year based upon percentage increases of Pueblo, CO Board
of Water Works rates from the previous calendar year. Total water lease expense was $34,632 and $44,813 for the years ended December
31, 2019 and 2018, respectively.
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 Right of Use asset and Lease liability values
at inception calculated at the present value of all future lease payments for the lease term, using an incremental borrowing
rate of 5%. The Lease Liability will be expensed each month, on a straight line basis, over the life of the lease.
On June 22, 2018, the Company entered
into a sublease agreement with ESDA Inc., a Florida Corporation. The Agreement went into effect as of July 1, 2018 with
a term of three years expiring August 31, 2021. The lease contains annual escalators and charges Florida sales tax.
Total depreciation expense related to the lease was $80,607 for the year ended December 31, 2019. Prior to 2019 the lease was
treated as an operating lease and right of use asset guidance was not applicable.
As of December 31, 2019 and December 31,
2018, operating leases have no minimum rental commitments.
NOTE 8: COMMON STOCK
During the year ending December 31, 2018,
the Company issued 12,596,208 shares of common stock for proceeds of $5,532,852, net of $409,495 issuance costs, and 306,250 shares
of common stock for marketing services valued at $388,000.
Veritas Farms, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 8: COMMON STOCK (CONTINUED)
In September of 2019, the board of
directors approved an amendment to the Company’s Certificate of Incorporation, as amended, to effect a 1-for-4 reverse
stock split on the issued and outstanding common. All relevant information relating to numbers of shares and warrants and per
share information have been retrospectively adjusted to reflect the reverse stock split for all periods presented. The
reverse split was effective on September 19, 2019.
During the year ending December 31, 2019,
warrants to purchase 3,886,011 shares of common stock were exercised for $1,519,467. Included in warrants exercised are 1,290,570
shares of common stock issued in accordance with a cashless exercise of warrants.
During the year ending December 31, 2019,
the Company issued 9,643,854 shares of common stock for proceeds of $13,360,377, net of $2,069,603 issuance costs, and 15,625 shares
of common stock for marketing services valued at $16,875.
NOTE 9: INCOME TAX
The reconciliation of income tax computed at the Federal statutory rate to the provision (benefit) for income taxes from continuing
operations is as follows:
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Federal Taxes (credits) at statutory rates
|
|
$
|
(2,470,000
|
)
|
|
$
|
(965,000
|
)
|
State and local taxes, net of Federal benefit
|
|
|
(526,000
|
)
|
|
|
(177,000
|
)
|
Change in valuation allowance
|
|
|
2,996,000
|
|
|
|
1,142,000
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Components of deferred tax assets are as follows:
|
|
Year Ended
|
|
|
|
|
|
|
December 31,
2019
|
|
|
December 31,
2018
|
|
Deferred Tax Assets;
|
|
|
|
|
|
|
|
|
Net Operating Loss Carryforwards
|
|
$
|
3,930,000
|
|
|
$
|
1,515,000
|
|
Stock Compensation
|
|
|
910,000
|
|
|
|
-
|
|
Accrued Related Party Expenses
|
|
|
-
|
|
|
|
5,000
|
|
Total Deferred Tax Assets
|
|
|
4,840,000
|
|
|
|
1,520,000
|
|
Valuation Allowance
|
|
|
(4,300,000
|
)
|
|
|
(1,304,000
|
)
|
|
|
|
|
|
|
|
|
|
Total Deferred Tax Assets net of Valuation Allowance
|
|
$
|
540,000
|
|
|
$
|
216,000
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
|
370,000
|
|
|
|
200,000
|
|
Prepaid Expense
|
|
|
170,000
|
|
|
|
16,000
|
|
Total Deferred Tax Liabilities
|
|
|
540,000
|
|
|
|
216,000
|
|
|
|
|
|
|
|
|
|
|
Net Deferred Tax Assets
|
|
$
|
-
|
|
|
$
|
-
|
|
Veritas Farms, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 9: INCOME TAX (CONTINUED)
The Company has approximately $14,500,000
net operating loss carryforwards that are available to reduce future taxable income. Those NOLs begin to expire in 2038. In assessing
the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the
deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal
of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based on the
assessment, management has established a full valuation allowance against all of the deferred tax assets for every period because
it is more likely than not that all of the deferred tax assets will not be realized.
The Company’s deferred tax liability
associated with timing differences related to depreciation and amortization includes $69,000 of liability resulting from tax depreciation
deducted in excess of GAAP depreciation prior to the Company becoming taxed as a C-Corporation.
The Company files income tax returns in
the U.S. federal jurisdiction, and the state of Colorado.
The Company adopted the provisions of FASB
ASC 740, Accounting for Uncertainty in Income Taxes. Management evaluated the Company’s tax positions and concluded
that the Company had taken no uncertain tax positions that require adjustment to the financial statements to comply with the provisions
of this guidance. The Company has no significant adjustments as a result of the implementation of FASB ASC 740.
NOTE 10: CONCENTRATIONS
The Company had two customers in year ended
December 31, 2019 accounting for 25% and 14% of sales. For the year ended December 31, 2018, one customer accounted for 31% of
sales.
The Company had two customers at December
31, 2019 accounting for 47% and 12% of accounts receivable. At December 31, 2018, the Company had two customers accounting for
30% and 24% of accounts receivable.
NOTE 11: RELATED PARTY
The Company incurred $59,906 and $239,305
of related party legal expenses during the years ended December 31, 2019 and 2018, respectively for legal services. As of December
31, 2019 and December 31, 2018, the Company had related party legal accruals for $0.
The Company entered into various note payables
with stockholders of the company between June 2017 and March 2019. The notes bear interest between 2.00% and 3.00% per annum. The
principal balance due on these notes was $0 and $262,924 as of December 31, 2019 and December 31, 2018. Interest accrued was $0
and $17,949 as of December 31, 2019 and December 31, 2018, respectively. The principal balance has been paid in full as of June
30, 2019.
Veritas Farms, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 11: RELATED PARTY (CONTINUED)
The Company issued stock incentives to
various directors and employees. Refer to Note 5 for additional details. The Company also issued 125,000 shares stock incentives
to a related party in 2019 that immediately vested with an exercise price of $0.98 with related stock compensation expense of $660,810.
NOTE 12: SUBSEQUENT EVENTS
The Company has evaluated subsequent events
through the date the financial statements were available to be issued.
The Company entered into a 61 month building
lease for extraction, manufacturing and distribution, commencing on February 28, 2020. For the first 13 months, monthly payments
will be $18,699, increasing 3% per year. A $200,000 deposit was made in 2019, but the lease was not executed until March 2020.
On January 16, 2020, warrants to purchase
153,279 shares of common stock were exercised on a cashless basis.
On April 7, 2020, the Company issued 50,000
shares of common stock for marketing services.
In December 2019, a novel strain of coronavirus (COVID-19) emerged in Wuhan, Hubei Province, China. While initially the outbreak
was largely concentrated in China and caused significant disruptions to its economy, it has now spread to most other countries
and infections have been reported globally. Because COVID-19 infections have been reported throughout the United States, certain
federal, state and local governmental authorities have issued stay-at-home orders, proclamations and/or directives aimed at
minimizing the spread of COVID-19. The ultimate impact of the COVID-19 pandemic on the Company’s operations is unknown
and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the
duration of the COVID-19 outbreak, new information which may emerge concerning the severity of the COVID-19 pandemic, and
any additional preventative and protective actions that governments, or the Company, may direct, which may result in an extended
period of continued business disruption, and reduced operations. Any resulting financial impact cannot be reasonably estimated
at this time but it may have a material adverse impact on our business, financial condition and results of operations. Management
expects that its business will be impacted to some degree, but the significance of the impact of the COVID-19 outbreak on
the Company’s business and the duration for which it may have an impact cannot be determined at this time.