See the Index to the Consolidated Financial Statements beginning on
page F-1 below.
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. (“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, 2020, 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 140-acre 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 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 materially from these estimates.
Veritas Farms, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Fair Value Measurement
The Company has adopted the provisions of Accounting
Standards Codification (“ASC”) Topic 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.
Veritas Farms, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Revenue Recognition
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
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, Plant and Equipment
Purchases 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 life of each class of assets and is computed using the
straight-line method.
Veritas Farms, Inc. and Subsidiary
Notes to
Consolidated Financial Statements
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, 2020 and December 31, 2019.
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 Topic 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. Prior to the adoption of Accounting Standards Update (“ASU”) No. 2018-07, Compensation-Stock
Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, (“ASU 2018-07”) the measurement
date for non-employee awards was generally the date the services are completed, resulting in financial reporting period adjustments
to stock-based compensation during the vesting terms for changes in the fair value of the awards. After adoption of ASU 2018-07, the
measurement date for non-employee awards is the later of the adoption date of ASU 2018-07, or the date of grant, without
change in the fair value of the award. For stock-based awards granted to nonemployees subject to graded vesting that only contain service
conditions, the Company has elected to recognize stock-based compensation expense using the straight-line recognition method.
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.
Veritas Farms, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Income Taxes
The Company accounts for income taxes under ASC
Topic 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 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 on December 31, 2020 and December 31, 2019.
Leases
The Company has one leased building 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 Topic 842, Leases (“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 operating lease liabilities and the corresponding assets were already recorded
in the balance sheet under the previous guidance, ASC Topic 840, Leases.
Veritas Farms, Inc. and Subsidiary
Notes to Consolidated Financial Statements
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
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. See Note 14: Subsequent Events
Veritas Farms, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 2: 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, 2020, the Company had an accumulated deficit of $26,667,147, and a net loss of $7,592,539. 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.
Management Plans
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.
NOTE 3: INVENTORY
Inventory consists of:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Inventory
|
|
|
|
|
|
|
Work In Progress
|
|
$
|
4,202,811
|
|
|
$
|
4,062,890
|
|
Finished Goods
|
|
|
1,232,944
|
|
|
|
1,983,107
|
|
Other
|
|
|
456,228
|
|
|
|
554,458
|
|
|
|
|
|
|
|
|
|
|
Inventory
|
|
$
|
5,891,983
|
|
|
$
|
6,600,455
|
|
During the periods ending December 31, 2020 and
December 31, 2019 the Company realized a loss from destruction of plants in the amounts of $0 and $77,387, respectively.
Veritas Farms, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 4: PROPERTY AND EQUIPMENT
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
Life
|
|
|
2020
|
|
|
2019
|
|
PROPERTY AND EQUIPMENT
|
|
|
|
|
|
|
|
|
|
Land and Land Improvements
|
|
|
-
|
|
|
$
|
398,126
|
|
|
|
398,126
|
|
Building and Improvements
|
|
|
39
|
|
|
|
1,553,722
|
|
|
|
1,510,175
|
|
Greenhouse
|
|
|
39
|
|
|
|
965,388
|
|
|
|
920,896
|
|
Fencing and Irrigation
|
|
|
15
|
|
|
|
203,793
|
|
|
|
203,793
|
|
Machinery and Equipment
|
|
|
7
|
|
|
|
2,480,474
|
|
|
|
2,480,475
|
|
Furniture and Fixtures
|
|
|
7
|
|
|
|
236,344
|
|
|
|
236,344
|
|
Computer Equipment
|
|
|
5
|
|
|
|
20,053
|
|
|
|
20,053
|
|
Vehicles
|
|
|
5
|
|
|
|
120,206
|
|
|
|
120,206
|
|
|
|
|
|
|
|
$
|
5,978,106
|
|
|
$
|
5,890,068
|
|
Less Accumulated Depreciation
|
|
|
|
|
|
|
(1,483,736
|
)
|
|
|
(976,005
|
)
|
Property and Equipment
|
|
|
|
|
|
$
|
4,494,370
|
|
|
|
4,914,063
|
|
Total depreciation expense was $1,483,736 and
$976,005 for the years ended December 31, 2020 and 2019, respectively.
NOTE 5: LONG-TERM DEBT
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Notes Payable which require monthly payments of $3,058, $555, and $1,415,
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
notes are secured by specific assets of the Company.
|
|
|
118,627
|
|
|
|
211,952
|
|
|
|
|
|
|
|
|
|
|
Note Payable which require monthly payments of $639, 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.
|
|
|
66,080
|
|
|
|
40,870
|
|
|
|
|
|
|
|
|
|
|
In May 2020, the Company received a loan in the amount of $803,994 under the Payroll Protection Program (“PPP Loan”). The loan accrues interest at a rate of 1% and has an original maturity date of two years which can be extended to five years by mutual agreement of the Company and SBA. (A)
|
|
|
803,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In September 2020, the Company received loan in the amount of $159,900 from the Small Business Administration as an Economic Injury Disaster Loan (“EIDL”). The loan accrues interest at the rate of 3.75% and has an original maturity date of 30 years. (B)
|
|
|
159,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,148,601
|
|
|
|
252,822
|
|
Less Current Portion
|
|
|
(870,074
|
)
|
|
|
(67,996
|
)
|
Long-Term Debt - net of current portion
|
|
$
|
278,527
|
|
|
$
|
184,826
|
|
Veritas Farms, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Long-term debt consisted of the following:
Future principal payments are as follows as of
the year ended December 31, 2020:
2021
|
|
|
$
|
66,080
|
|
2022
|
|
|
|
893,662
|
|
2023
|
|
|
|
32,813
|
|
2024
|
|
|
|
24,494
|
|
2025
|
|
|
|
131,552
|
|
|
|
|
$
|
1,148,601
|
|
(A) In May 2020, the Company received a loan in
the amount of $803,994 under the Payroll Protection Program (“PPP Loan”). The loan accrues interest at a rate of 1% and has
an original maturity date of two years which can be extended to five years by mutual agreement of the Company and SBA. The PPP loan contains
customary events of default relating to, among other things, payment defaults and breaches of representations and warranties.
Under the terms of the loan, a portion or all
of the loan is forgivable to the extent the loan proceeds are used to fund qualifying payroll, rent and utilities during a designated
twenty-four-week period. Payments are deferred until the SBA determines the amount to be forgiven. The Company utilized the proceeds of
the PPP loan in a manner which should enable qualification as a forgivable loan. However, no assurance can be provided that all or any
portion of the PPP loan will be forgiven. The balance on this PPP loan was $803,994 as of December 31, 2020 and has been classified as
a short-term liability in notes payable.
(B) In September 2020, the Company received loan
in the amount of $159,900 from the Small Business Administration as an Economic Injury Disaster Loan (“EIDL”). The loan accrues
interest at the rate of 3.75% and has an original maturity date of 30 years.
Up to $10,000 of the EIDL can be forgiven as long
as such funds were utilized to provide working capital. The residual amount of the loan is payable under the previous terms. The first
payment due is deferred one year. The entirety of the loan as of December 31, 2020 has been classified as a long-term liability in notes
payable.
NOTE 6: CONVERTIBLE DEBT
In March 2020, the Company secured a $200,000
loan from a single investor, evidenced by a one-year convertible promissory note (the “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. The
note matures on the first anniversary of the original issuance date or such earlier date on which this Note becomes due in accordance
with its terms.
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. The Company determined that
there was a beneficial conversion feature of $95,000 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 $23,750 on the accompanying balance sheet with amortization
to interest expense of $71,250 for the year ended December 31, 2020. As of December 31, 2020, $13,677 of interest has been accrued.
NOTE 7: 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. 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.
Veritas Farms, Inc. and Subsidiary
Notes to
Consolidated Financial Statements
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 typically 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 typically vest partially upon grant date, with the residual vesting over the subsequent 6 or 12 months.
Stock-based compensation expense was as follows:
|
|
Twelve Months Ended
|
|
|
|
December 31:
|
|
|
|
2020
|
|
|
2019
|
|
Non-Qualified Stock Options - Immediate
|
|
$
|
-
|
|
|
$
|
998,603
|
|
Incentive Stock Options - Time Based
|
|
|
2,028,460
|
|
|
|
1,368,149
|
|
Total Stock-based Compensation Expense
|
|
$
|
2,028,460
|
|
|
$
|
2,366,752
|
|
Stock option activity was as follows in the periods
ended December 31, 2020 and December 31, 2019:
|
|
Stock
|
|
|
Weighted- Average
|
|
|
Weighted- Average
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Remaining Life
|
|
Outstanding at December 31, 2018
|
|
|
2,275,000
|
|
|
$
|
1.06
|
|
|
|
9.36
|
|
Granted
|
|
|
2,043,750
|
|
|
$
|
1.23
|
|
|
|
9.78
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited/Canceled
|
|
|
(25,000)
|
|
|
$
|
2.56
|
|
|
|
-
|
|
Outstanding at December 31, 2019
|
|
|
4,293,750
|
|
|
$
|
1.13
|
|
|
|
9.03
|
|
Granted
|
|
|
50,000
|
|
|
$
|
0.27
|
|
|
|
9.75
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited/Canceled
|
|
|
(149,999)
|
|
|
$
|
1.42
|
|
|
|
-
|
|
Outstanding at Dec 31, 2020
|
|
|
4,193,751
|
|
|
$
|
1.11
|
|
|
|
8.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested at Dec 31, 2020
|
|
|
3,935,429
|
|
|
$
|
1.10
|
|
|
|
8.00
|
|
Exercisable at Dec 31, 2020
|
|
|
3,935,429
|
|
|
$
|
1.10
|
|
|
|
8.00
|
|
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:
Year ended December 31, 2019 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
|
|
Year
ended December 31, 2020 Valuation Assumptions
|
|
|
|
Risk-free interest rate
|
|
|
0.36% – 1.79
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
Expected stock price volatility
|
|
|
213% to 227
|
%
|
Expected life of stock options (in years)
|
|
|
10
|
|
Veritas Farms, Inc. and Subsidiary
Notes to
Consolidated Financial Statements
NOTE 8: LEASES
We adopted ASC 842 using the modified retrospective
approach, electing the practical expedient that allowed us to not to restate our comparative periods prior to the adoption of the standard
on January 1, 2019.
The Company recognized the following related to
leases in its Consolidated Balance Sheet:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Right of Use Lease Liabilities
|
|
|
|
|
|
|
Current portion
|
|
$
|
240,324
|
|
|
$
|
80,046
|
|
Long-term portion
|
|
|
730,164
|
|
|
|
52,798
|
|
|
|
$
|
970,488
|
|
|
$
|
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 $38,627 and $34,632 for the years ended December 31, 2020 and December 31, 2019, respectively. The company
terminated this lease in October 16, 2020
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, 2019, the Company entered into a sublease
agreement with ESDA Inc., a Florida Corporation. The Agreement went into effect as of July 1, 2019 with a term of three years expiring
August 31, 2021. The lease contains annual escalators and charges Florida sales tax. Total lease expense was $195,144 for the year ended
December 31, 2020 and $115,098 for the year ended December 31, 2019.
As of December 31, 2020, and December 31, 2019,
our operating leases have no minimum rental commitments.
Veritas Farms, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 9: COMMON STOCK
In September 2019, the Company commenced a $4.0
million private offering of up to 8,000,000 Units (which may be increased by the Company up to 12,000,000 Units) at a price of $0.50
per Unit. 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. The Company
also entered into a registration rights agreement with the Investors which states, among other things, that on or prior to the filing
date, 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 on such filing date that are not then registered on an
effective registration statement.
In April of 2020, the Company issued 50,000 shares
of common stock for services. Upon grant date the value of the stock was valued at $36,200 based on the market price of $0.72 of the Company’s
common stock.
In March of 2020, the Company issued 153,279 shares
of common stock in accordance with a cashless exercise of warrants.
In 2019, 3,886,011 stock warrants were exercised
for proceeds of $1,517,501.
In 2019, the Company issued 9,643,854 shares of
common stock for proceeds of $15,372,380, net of $2,010,039 issuance costs, and 15,625 shares of common stock for marketing services valued
at $16,876.
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 shares. 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 effected on September 19, 2019.
Veritas Farms, Inc. and Subsidiary
Notes to
Consolidated Financial Statements
NOTE 10: 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,
2020
|
|
|
December 31,
2019
|
|
Federal Taxes (credits) at statutory rates
|
|
$
|
(1,548,000
|
)
|
|
$
|
(2,470,000
|
)
|
State and local taxes, net of Federal benefit
|
|
|
(339,000
|
)
|
|
|
(526,000
|
)
|
Change in valuation allowance
|
|
|
1,887,000
|
|
|
|
2,996,000
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Components of deferred tax assets are as follows:
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
Deferred Tax Assets;
|
|
|
|
|
|
|
Net Operating Loss Carryforwards
|
|
$
|
5,280,000
|
|
|
$
|
3,930,000
|
|
Stock Compensation
|
|
|
426,000
|
|
|
|
910,000
|
|
Total Deferred Tax Assets
|
|
|
5,706,000
|
|
|
|
4,840,000
|
|
Valuation Allowance
|
|
|
(5,070,000
|
)
|
|
|
(4,300,000
|
)
|
|
|
|
|
|
|
|
|
|
Total Deferred Tax Assets net of Valuation Allowance
|
|
$
|
636,000
|
|
|
$
|
540,000
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization
|
|
|
424,000
|
|
|
|
370,000
|
|
Prepaid Expense
|
|
|
212,000
|
|
|
|
170,000
|
|
Total Deferred Tax Liabilities
|
|
|
636,000
|
|
|
|
540,000
|
|
|
|
|
|
|
|
|
|
|
Net Deferred Tax Assets
|
|
$
|
-
|
|
|
$
|
-
|
|
The Company has approximately $19,074,600 net
operating loss carryforwards that are available to reduce future taxable income. 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 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 has no significant adjustments as a
result of the implementation of ASC 740.
Veritas Farms, Inc. and Subsidiary
Notes to Consolidated Financial Statements
NOTE 11: CONCENTRATIONS
The Company had one customer in the year ended
December 31, 2020 that accounted for 14% of sales. For the year ended December 31, 2019, one customer accounted for 25% of sales and another
customer accounted for 14% of sales.
NOTE 12: RELATED PARTY
A law firm owned by the brother of Alexander M. Salgado, our Chief
Executive Officer, rendered legal services to the Company during the years ended December 31, 2020 and December 31, 2019. The firm incurred
expenses in aggregate of $123,900 and $157,500 for such services during 2020 and 2019, respectively.
The Company paid $5,714 of related party interest
in 2019 attributable to a loan from a principal shareholder. The balance of the loan was $0 as of December 31,2019. There were no related
party interest payments made in 2020.
The Company issued stock incentives to various
directors and employees.
NOTE 13: CONTINGENCIES
On July 10, 2020, Carrick-Harvest, LLC d/b/a
Veritas Fine Cannabis ("Carrick") filed an action against Veritas Farms in the U.S. District Court for the District of Colorado,
alleging trademark infringement and unfair competition under the Lanham Act, cybersquatting under federal law, and common law unfair
competition under Colorado law. Carrick alleges Veritas Farms violated these provisions through use of the alleged trademark VERITAS
by providing "informational services" through its website. The action seeks an order that Carrick is the rightful owner of
and has superior trademark rights in the marks and preventing Veritas Farms from registering their alleged infringing marks with the
USPTO. On January 25, 2021, the Magistrate Judge issued a recommendation that Veritas Farms' motion to dismiss be Granted on all counts.
Since then, both sides have filed responses to the Magistrate Judge's recommendation and awaiting a final ruling from the District Court
Judge. Carrick recently reached out to Veritas Farms in hope of resolving this matter via a non-monetary co-existence arrangement, which
Veritas Farms is entertaining pending the District Court Judge's final ruling. Based on the foregoing, it seems a favorable outcome is
likely.
On January 22, 2021, EMC Outdoor, LLC filed an
action against Veritas Farms in Broward County Circuit alleging breach of contract and claiming damages in the amount of $304,782.50.
Veritas Farms was served on March 10, 2021 and its initial response to the allegation was due on March 31, 2021. We filed for an Extension
of Time to Respond to Complaint on March 30, 2021. Plaintiff has not responded as of this time. At this time, the Company does not possess
sufficient information to evaluate the likelihood of a favorable or unfavorable outcome or estimate a related prospective loss.
NOTE 14: SUBSEQUENT EVENTS
The Company has evaluated subsequent events through
the date the financial statements were available to be issued.
On February 10, 2021, the Company terminated
the lease on the distribution facility in Aurora, CO. Primarily as a result of the impact of the Covid-19 Pandemic, Veritas has entered
into a Conditional Lease Termination Agreement with Majestic Commercenter Phase 9, a Delaware limited liability company (“Majestic”),
in respect to the termination of its commercial lease in Aurora, Colorado (“Termination Agreement”). Pursuant to the terms
of the Termination Agreement, Veritas made one payment of $125,000 on February 23, 2021. The final payment of $125,000 is due to Majestic
on April 16, 2021, upon which both parties will be released from all further obligations to each other.
On February 11, 2021, the Company entered into
a lease agreement for a 12,240 square foot product production and distribution facility in Pueblo, Colorado. The Pueblo, Colorado facility
is leased from a non-affiliated party at a current monthly rental of $4,590. The monthly rental fee increases by 10% each year until the
completion of the lease on February 28, 2024.
On February 22, 2021, the Company received a second
loan in the amount of $803,994 under the Payroll Protection Program (“PPP Loan”). The loan accrues interest at a rate of 1%
and has a maturity date of five years.
On March 22, 2021, the Company under the 2019
Private Offering, sold 200,000 units for a total of $100,000 less offering fees of $13,105 resulting in net proceeds of $86,895
On April 8, 2021, the Company entered into secured
convertible promissory note in the amount of $124,000. The note is due on May 10, 2021. The note bears an interest rate of 8% and is secured
by the assets of the Company.